0% balance transfer or low-rate credit card: which could cost less?

0% balance transfer or low-rate credit card: which could cost less?

Key points

• A 0% balance transfer can be cheaper when you can clear the transferred balance inside the promotional period and avoid adding new purchases.
• An ongoing low-rate credit card may be easier to plan around when you need longer than the promotional period, however interest starts accruing straight away.
• Compare the transfer fee, annual fee, repayment, promotional end date, revert rate and purchase rate. The headline rate doesn't show the full cost.
• Applying for either option creates a credit enquiry. Compare the terms before applying rather than submitting several applications to test what you might receive.

A 0% balance transfer and an ongoing low-rate credit card can both reduce the rate you're paying on an expensive credit card balance. They handle interest differently. A balance transfer gives you a set promotional period, while a low-rate credit card charges interest from the start without a promotional expiry.

Which one could cost less will depend mainly on how long you need to clear the balance and whether you can avoid using the new credit card for purchases while you pay it down.

When could a 0% balance transfer cost less?

A 0% balance transfer is most useful when your repayment clears the full amount before the promotional period ends. The transfer fee and any annual fee still count, however the transferred balance doesn't accrue interest during the offer period while you meet the terms.

Take a $6,000 balance with an 18-month 0% period and a 2% transfer fee (illustrative). The fee adds $120, leaving $6,120 to clear. Paying $340 a month clears that amount in 18 months.

This example excludes an annual fee and assumes every repayment arrives on time, no new purchases are added and the promotional terms remain in place. When you compare an actual offer, use assumptions that reflect how you'll use the credit card.

The minimum repayment will probably be lower than $340. Paying only the minimum can leave a large balance when the promotion ends, at which point the revert rate applies. Work backwards from the end date and use the clearing repayment rather than the minimum as your plan.

When could an ongoing low rate work better?

An ongoing low-rate credit card may be easier to manage if you need more time than the promotional offer gives you. You pay interest from the first statement, however the plan doesn't depend on finishing before a promotional rate expires.

Using the same $6,000 balance at 12.99% and paying $340 a month (illustrative), you would clear it in about 20 months and pay around $695 in interest. This example assumes there is no transfer fee, annual fee or new spending.

This costs more than the 0% example, however the repayment plan isn't tied to an 18-month window. At $280 a month, the low-rate example takes about 25 months and costs around $864 in interest. At that repayment, you wouldn't clear the balance transfer before its promotional rate ends.

An ongoing low-rate credit card can also be more straightforward if you expect to carry a balance from time to time after paying off the amount you move. That doesn't mean carrying a balance is cheap. It means the ongoing purchase rate may matter more than a short promotional rate if this will remain your everyday credit card.

Compare both options using the same repayment

Use the same repayment for both options. Pick an amount you could maintain during ordinary months and more expensive ones, rather than comparing an affordable plan with an ambitious repayment you may only manage for a short time.

Check these numbers:

• how much of the old balance will move
• the transfer fee and annual fee
• the promotional rate and end date
• the rate on anything left after the promotion
• the ongoing low rate and whether it can change
• the purchase rate on new spending
• the repayment needed to finish each option
• the total interest and fees over the time you expect to take

Compare both options in the balance transfer calculator using the same balance and repayment. You'll see the amount left when the promotion ends alongside the low-rate credit card's payoff time, interest and fees.

If one option takes longer, compare more than the monthly repayment. A smaller payment may make things easier week-to-week, however you could pay more overall because the debt remains open for longer.

What if you keep using the new credit card?

New purchases can change the comparison quickly. On a balance-transfer credit card, purchases may be charged at a separate, much higher purchase rate. Interest-free days may not apply while the transferred balance remains, depending on the terms.

On a low-rate credit card, purchases may receive the ongoing low rate, however they still increase the balance you're trying to clear. Either way, a $300 grocery shop placed on the credit card is another $300 plus any interest that applies. If the repayment stays the same, the payoff date moves.

If possible, use a debit card or transaction account for new spending while paying the transferred balance. If some essentials are likely to go back onto credit during tight weeks, include that amount in the calculation rather than building the plan around zero new spending.

Install WeMoney and connect the old and new cards to see both balances, their repayments, your other debts and everyday spending in one place. This gives you the full financial picture around the card decision and shows whether the plan you modelled still matches what is happening.

WeMoney uses your connected accounts and credit information to show personalised savings opportunities in the For You section. Depending on your position, these may include credit-card payoff, debt-consolidation or refinancing options. Open the app to see your personalised opportunities, then compare any offer with the card paths above. Potential savings and approval are not guaranteed.

What does applying change?

Both options involve applying for new credit. The provider may look at your income, expenses, existing limits, repayment history and credit report before deciding whether to approve the application and what limit to offer.

An application creates a credit enquiry on your credit report. Several applications over a short period may affect your credit score and may look risky to a lender. Read the key facts sheet, eligibility information and terms before applying, and ask the provider if the transfer cap or rate isn't clear.

Checking your own credit report is different from applying. You can obtain your reports for free every 3 months from Australia's credit reporting bodies, which can help you spot errors before an application.

When neither option fixes the problem

A new credit card changes the rate and where the balance sits, however it doesn't create more money for repayments. If the amount you can afford is below what either option needs, or groceries and bills keep going back onto credit, work through the cash-flow problem before applying.

Where several credit cards, personal loans or buy now pay later balances are involved, a credit card transfer may cover only part of the debt. Compare the full cost and repayment load of leaving the debts separate with the other ways of organising them. If you are missing repayments or can't cover essentials, speak with the providers' hardship teams or contact the National Debt Helpline for free financial counselling.

Sources

• MoneySmart: Credit card balance transfers
• MoneySmart: Choosing a credit card
• MoneySmart: Pay off your credit card
• OAIC: Access your credit report

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.