Consumer Watch: Chase low rates, but be wary of debt

Emma Consedine has a $7,000 debt but hasn't swapped to a lower interest rate. Photo / Michael Craig

Low-cost credit cards can create bigger burdens for less-than-savvy customers

Offers of low interest rates on credit cards are tempting but consumers may end up paying more than they realise.

All the major banks offer reduced interest rates on credit cards for transferred balances.

BNZ offers 4.99-8.95 per cent for six months, Kiwibank has 2.99 per cent for six months, ANZ offers 2.99 per cent for 12 months and Westpac is advertising 5.95 per cent until the balance is paid. Westpac offered 1.99 per cent this year.

The banks were not keen to divulge how many customers took up the offers or how much money was being transferred. However, ANZ is in the middle of a large television campaign which suggests the business is worthwhile.

ANZ's Sonia Ball said switching was popular with people who had made big purchases as it could be cheaper than hire purchase.

Claire Matthews, of the Massey University centre for banking studies, said balance transfers were a good way to hook customers. "If they didn't do well, the banks would stop doing them."

She said consumers needed to realise the interest rate would revert to the card's standard rate at some point.

And she said people who used a low-interest card to make more purchases could be caught out. The low-interest portion of the card would be paid off first, leaving the higher-interest new purchases earning interest. "You're only paying a low interest rate on the transferred balance. Any new payment is on a higher interest."

A person with $1,000 on a low rate who spent $200 on the card, then paid off $200, would find their low-interest amount reduced to $800 and their new purchase untouched. Matthews said: "It's important to understand how payments are attributed. They pay off the oldest first. If you are putting more purchases on, think about what you are paying compared to your old card."

Auckland woman Emma Consedine has a couple of credit cards with a total balance of $7,000. She could save $47 a fortnight by moving to one of the advertised rates but has not done so yet.

"I've thought about it but it just feels like a hassle. I think it would be worth it, for sure. I just haven't bothered."

Adviser Lisa Dudson said low-interest balance transfers could be a good tool if used properly. "The danger is that they move the problem sideways."

Some clients had transferred a balance and racked up more debt. "Moving from 20 per cent interest to 5 per cent makes sense providing you pay it off." There is no interest-free period on transferred balances.

Sorted's David Kneebone said people should talk to their banks before switching because they would sometimes match rates.