Customers warned about enticing credit card deals

CREDIT card customers wanting to clear debt in the new financial year are facing costly debt traps.

CREDIT card customers laden with debt in the new financial year should take care if turning to quick-fix solutions to wipe money owing on plastic.

Financial institutions have plenty of enticing balance-transfer deals on offer including honeymoon interest-free periods of up to 26 months available, allowing customers a set time to wipe their debts.

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But experts warn while these deals — where you transfer debt from one card to another — can be a great way to shave down debt, it’s easy to get caught by spending on the card while at the same time trying to pay off a lump sum.

If customers do make purchases on balance-transfer cards they should be warned — interest-free days on the new purchases will be unlikely to apply.

A report released last week by the Australian Securities and Investments Commission found that one-third of people who take out balance transfer deals end up worse off financially with higher debt.

Customers rushing in to sign up to balance-transfer deals should be mindful of the fees and charges that apply.

ASIC found that while half of balance transfer customers reduced their total debt, 60 per cent did not cancel their previous card and some increased their debt by more than 50 per cent.

New data from financial comparison website iSelect found on their database there are nearly 60 balance-transfer deals available and honeymoon periods range from six to 26 months.

And while these periods have no interest charges be warned once these periods end the zero per cent interest rate usually jumps to the cash advance rate.

In many cases this is more than 20 per cent and it can bite customers badly.

ISelect spokeswoman Natalie Pennisi said customers need to be careful before they sign up to these deals.

ISelect spokeswoman Natalie Pennisi said balance-transfer deals can be a good way to pay down debt if you maximise the interest-free honeymoon period.

“If you’re thinking about doing a balance transfer, take a good look at whether or not a honeymoon period offer is right for you,’’ she said.

“Read the fine print and make sure you know what the interest rate is post that honeymoon period because it is more than likely going to increase.”

Annual fees can also be as high as $700.

Latest Reserve Bank of Australia figures show Australians owe more than $51.9 billion on plastic and more than $32.4 billion is accruing interest.

Australians owe more than $51.9 billion on credit cards.

Crown Money Management’s chief executive Scott Parry said maximising these interest-free periods is critical to paying down your debt.

“Having 26 months is a long time, you have to work out your total debt amount, divide that by 26,’’ he said.

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“That’s your monthly repayment to make sure you can pay off the principal by the time the balance-transfer ends and the honeymoon is over.”

Customers should also be aware customers can be charged a balance-transfer fee — often around two or three per cent — which applies when moving debt onto the new card.

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@sophieelsworth