02.Worst traps to avoid
Trap #1: The “payment hierarchy” con
When you make repayments, they’re firstly applied to the balance transfer amount, even if it has a 0% interest rate or some time before the introductory period expires, and even if other purchases and cash advances are accumulating interest at higher rates. For example, with Westpac, “Payments made to your credit card account are first applied to any amounts transferred from other credit cards, charge cards or store cards under this promotion, before they are applied to any other purchase or cash advance amount. This means that the portion of your outstanding account balance that is subject to a lower interest rate will be paid off first.”
Such practices could soon be illegal in the UK, having been described by one personal finance commentator as “the single biggest stealth charge that credit cards levy .” Something needs to be done in Australia too. Katherine Lane, Principal Solicitor with the Consumer Credit Legal Centre in NSW, says the payment hierarchy practice “is a trick most often used in interest free deals (attached to credit cards) to trigger interest being charged. It is completely unfair.”
Trap #2: High interest on new transactions
After you transfer your debt to a low-interest card, any new transactions you make usually attract interest immediately at the standard rate, which is invariably much higher than the low introductory rate. You may have no interest-free period with such transactions. For example, with Citibank’s 2.9% balance transfer card, “any transactions made other than with this offer are at the standard Credit Card rate, currently 20.39% pa.” Similarly, Westpac's fine print states “you will not gain the benefit of the interest free period on credit purchases until the full balance (including any balance transfer and any other promotional amount) is paid by the statement due date each month.”
Not every provider treats new transactions in this way. Aussie’s card, for example, offers the low introductory rate to new purchases for the first six months, as well as to balances transferred. NAB also offers its 0% balance transfer rate to new purchases for the first six months, but interest applies to other types of transactions. It's terms state that the “0% purchase rate excludes cash advances (including bills paid over the counter at a bank, financial institution or post office and for the purchase of travellers cheques).”
Trap #3: Luring you into a bad deal
The balance transfer might simply be the hook that lures you into a card that’s otherwise poor value in terms of fees and standard interest rates. Many have standard annual interest rates close to 20% or even higher.
Trap #4: Percentage fees
A fee may apply to transfer the balance. For example, according to Bankwest’s small print, with Zero MasterCards there’s “a 1% Balance Transfer Handling Fee to a maximum of $50 that applies to each balance transferred”.
Trap #5: Double trouble
You might be tempted to keep spending on the old credit card, increasing your debt problems and requiring even bigger debt repayments for two cards and increasing your problems. Consider cutting up the old card.