By Emma Geraghty

Most banks are now back promoting deals to credit card holders that allow them to transfer their balance onto a new card at a low interest rate for a specified period of time, aiming to win market share and ramp up lending as the economy recovers.

Many banks withdrew their special 'balance transfer' promotions during the depths of the financial crisis in late 2008 and early 2009 in an effort to avoid being swamped by heavily indebted customers looking for an easy way out.

A balance transfer can act as temporary relief to card holders with a large amount of debt looking for a quick solution to service the debt. However, customers still often end up paying a high interest rate on any purchases above their transferred balance, which remains at a low interest rate for a specified time only -- often 6 months.

All of the big banks except ASB now offer the special interest-only deals, with offers ranging from 2.99% to 8.75% for around six months, well below the regular interest rates of around 19.99%. The Warehouse has the lowest rate at 2.99% and ANZ and National have the highest at 8.75%. See bank credit card rate details here.

ASB General Manager of cards transactions and payments Shaun Drylie said ASB did not offer a special balance transfer rate because it aimed to provide a competitive interest rate on total balances. Non ASB customers can still transfer balances to ASB, but must pay the full rate on all the balance from the start.

"Our low-interest Mastercard is proving extremely popular, with a rate which is more than 1/3 lower than a standard credit card," Drylie said. ASB offers a 'low interest/no rewards' Mastercard from 12.50%.

When lower equals higher

Many balance transfer offers looked very attractive on the transferred balance for a short period, but were significantly more expensive over all balances over a longer period, Drylie said.

"For customers finding it difficult to get their debts under control, we suggest they consider a personal loan instead of increasing their credit card limit, as this makes it easier to regularly reduce their debt, which reduces the total cost of the debt," he said. ASB's unsecured personal loan rate is 17.95%. See all bank personal loan rate details.

Kiwibank has been offering balance transfers since August 2007. Its current balance transfer offer is for 6 months.

Kiwibank Communications Manager Bruce Thompson said card holders needed to be careful when taking up such an offer as any payments made will typically go towards paying off the balance transfer first, prior to paying off any balance owing on purchases.

The devil in the details

For example: A customer opens account with a balance transfer of $5000. The customer then continues to spend $500 per month on their card. In effect, if the customer never pays off their balance, then any purchases they make will continue to revolve at a much higher rate.

"Any payments you make go towards this balance first rather than any purchases you make. This means you will pay a much higher interest rate on any purchase until which point that you have paid off the original $5,000," Thompson said.

Thompson said Kiwibank makes customers repay a minimum monthly amount of 5% off the balance transferred, which is higher than other banks' 1.5% to 2.5%.

A BNZ spokesperson said balance transfer promotions were popular and there had been a good response to the current offer of 4.99% which was launched on February 12. It is due to expire at the end of March. BNZ offered a similar promotion last year that lasted for a longer period.

Westpac introduced its current 5.95% balance transfer promotion in January to gain new credit card customers.

Serial switchers

Veda Advantage managing director John Roberts said it was common for people who had maxed out their credit cards to switch from bank to bank taking advantage of the low interest rate for the specified period of time.

"With credit card transfers there can be up to a 44 days grace period. It gives people a bit of breathing wind and they end up paying a lower interest rate," Roberts told interest.co.nz.

"People in New Zealand can quite easily get away with transferring their balance from bank to bank as we only have a negative credit report to see what someone's credit report is," Roberts said.

Under New Zealand's system, a customer's defaults and late payments are recorded, while the 'positive' or 'comprehensive' credit reporting system used in the United States and elsewhere  includes all of a customer's credit history, including how often they pay on time.

New Zealand, France and Australia were the only OECD countries that used a negative credit reporting system to build someones credit rating. This is under review for a switch a comprehensive credit reporting system, he said.

"This is a far more equitable way of understanding whether people can cope with more credit or not. It helps improve responsible lending where lenders are able to see full disclosure of either this person can cope with more credit or can not," Roberts said.