Get Sorted: More debt traps to dance around

By dancing around debt traps, make sure your credit card is working for you and not the other way around. Photo / Thinkstock

Transferring your credit card balances to lower-rate cards can save you hundreds of dollars, but here’s how to avoid unwelcome surprises.

Well we hit a major financial milestone at home a few weeks ago - my daughter got her first debit card. The local mall is now on notice: she is armed with intent.

Wouldn't you know it, days later it was declined at the dairy after she forgot to check her balance - a hard but important lesson. But perhaps the most unsettling thing was the way she bragged to her brothers that she had a credit card! I quickly intervened. Let's just call these teachable moments, shall we?

There are a number of debt traps to dance around. Transferring your debt from one credit card to another, for instance, can be a good way to save hundreds of dollars because of a lower interest rate. But this can come with some unpleasant surprises, so you need to understand how transfers work.

Sorted's debt calculator can show you whether a transfer will save you money and how much. You can also see how much quicker you could be out of debt entirely.

When you transfer your credit card balance, your new bank pays the debt on your old card, and now you owe them the money. That comes with conditions: the most important of which is how long that special rate is good for. If you carry your transferred balance beyond that, you'll fall into paying a much higher rate all over again.

It gets more complicated when you start to make purchases and cash advances on your new card after your transfer. These are not typically part of the low-rate deal, so you'll be hit with the standard, higher rate.

And when you make payments, hoping to clear those higher rate purchases or cash advances, you'll find that your payments are used to pay the lowest-interest rate debt (that amount you initially transferred) first. So you're still left with the amounts owing at the higher rate. That's how it works.

But the biggest debt trap? Leaving your old card open instead of cutting it up. That's one of the easiest ways ever to fall deeper into debt - having that old credit limit still there just waiting to be run up all over again. You end up carrying debt on two cards.

Remember, you're in control here. By dancing around these debt traps, you can make sure your credit card is working for you and not the other way around.

Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and calculators at Sorted - brought to you by the Commission for Financial Capability - at sorted.org.nz.