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Infestation of sweet deals

Consumers are switching to credit cards with low balance-transfer rates in a bid to pay off debt faster but unless they go into these arrangements with their eyes open they might find the deal they get is not what they expected.

They need to make sure the interest rate they pay at the end of the introductory period is the normal purchase rate and not a higher rate.

More particularly, they need to recognise that any spending on the new card will attract interest immediately at the standard rate, not the lower balance-transfer rate, and could negate much of the benefit they get from the low-rate offer.

The chief executive of the banking industry research group InfoChoice, Shaun Cornelius, says there has been a lot of inquiries about balance-transfer offers on the company's website.

"Balance-transfer deals are the most popular cards on the site," Cornelius says.

"People want to get their debt down and they see the low interest rates on these products as a way of doing that.

"In other cases they are dealing with household debt stress and they are looking for a repayment holiday."

Cornelius says using a balance-transfer offer to pay debt faster makes sense but it has to be the right offer and the card holder has to be disciplined about how the card is used.

He says that if people are trying to reduce credit card debt, they should be looking for a card that offers a low rate as a long-term option.

The accompanying balance-transfer cards table shows all the low-rate cards in the market with balance-transfer offers. What is important to note is that of the 13 options available, four revert to the higher cash-advance rate. They are Citibank's Clear Platinum, National Australia Bank's Low Rate Visa, Commonwealth Bank's Low Rate Credit Card and Westpac Low Rate.

In the case of the Citibank card, for example, the issuer offers six months at zero interest and then any outstanding balance would start to accrue interest charges at the cash-advance rate of 20.74 per cent, not the 10.99 per cent purchase rate.

Cornelius says card holders should make it a rule that if they take up a balance-transfer offer they should not make any purchases on the card during the offer period.

"The way these offers work is that the balance you transfer on to the new card is paid off first," he says. "All new purchases accrue interest at the reversionary rate from day one and that balance is not touched until the balance you have transferred is paid. You need to avoid spending on the card during that period. An option is to have a second card for spending so that you don't have to touch the balance-transfer card."

Cornelius says that if consumers avoid cards that revert to a cash-advance rate and follow the rule about not spending during the offer period, they can save money.

The balance-transfer savings table shows the outcomes for a number of different card offers. Assuming a $10,000 balance transfer and no additional spending, the interest savings can be anywhere from $1402 to $4389, depending on the terms of the deal.

The balance-transfer offers that last for six months and then revert to a purchase rate about the average of 17.9 per cent provide the lowest interest savings. The consumer would be better off skipping the balance transfer offer and opt instead for a low-rate card.

Cards that revert to low rates at the end of the balance-transfer period offer a much better saving.

According to the InfoChoice data, the biggest saving comes from cards that offer a balance transfer rate "for life" (that is, the rate continues until the transferred balance is paid off). These issuers include Australian Central Credit Union, Citibank (Platinum and Emirates Citi Platinum cards), Community CPS, CUA, IMB and United Community, which all offer 4.9 per cent for life.

Cornelius says something else to pay attention to is what happens to the old card. Some card issuers will automatically close the old card account when they make the balance transfer.

Others leave it up to the customer to decide what to do with the old account. Leaving the old account open may become a problem for people who are trying to cut down their debt.

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A loan in which the borrower (the mortgagor) offers a property and land as security to the lender (the mortgagee) until the loan is repaid. Repayments of the loan are usually made on a monthly basis over a long period of time, typically 25 years.