Make no mistake about it, a balance transfer program is actually a type of loan. Many banks and financial institutions will surely offer you such programs to help you reduce your current loan but what you are actually doing is entering into another loan to clear your current one(s).
How balance transfers work?
When you enter into a balance transfer program, you are taking a debt from one bank and then transferring it to another bank. This could happen from different banks or could be from the same bank itself.
Where is the attraction?
The main attraction for taking a balance transfer is low interest rate. In most cases, these programs are designed to help you save on interest rates that you incur from your credit cards as they are among the highest. For instance, if you owe RM20,000 in your credit card at the current rate of 18% interest per annum. When you transfer this amount into a balance transfer, you could potentially save up to RM3,600 per annum.
Why banks offer this?
When you are a customer of a bank, they will always try to keep you with them for as long as they can. This is because the longer you remain as a customer, the more interest you will be paying which means the higher the revenue will be for the bank. As such, they will offer you all sorts of products to achieve this objective. As such, it is not surprising that banks offer balance transfers so that:
- you use their credit cards for a longer time (which means more)
- they can keep you in their interest rate program
In other words, they are giving out an offer so that you will become their 18% per annum customer eventually again.
Why you should take the balance transfer program?
Getting into a balance transfer program should benefit you and not only the bank. No doubt the bank will surely make money from you but you should not be shortchanged in any way. So, the first thing you must remember is to take the balance transfer from another bank and if possible, not from the same bank.
You should only get into a balance transfer program only if the interest rate is attractive. Always examine the interest rate and the period of the rate. In most cases, banks will offer up to 12 months but could be up to 36 months, depending on the bank and package. If you take a longer term, the interest rate will surely be higher.
Therefore, it would be more logical if you have a large debt with a credit card to go into a longer termed loan. Some banks will offer you 0% interest for 12 months but maybe 3-5% for 24 months. If your debt is very high, going for the latter will make better sense as it gives you more time before it reverts back to the 18% per annum rate.
Very important advice
One thing for sure, you must try to clear the debt of this card before the expiry of the low-interest rate period. This is because if you allow the debt to go back to its 18% interest rate period, then it will be a lot higher than any other loan you can get. In that case, it would make more sense to get a personal loan instead. Remember that if you are going to use a balance transfer program, then you must be able to service the period that it comes with.
Another piece of advice is that you must check all the costs involved. Although some claim to give you 0% interest rate, they might come with an administration or processing fee. If the bank charges you 2% for such a fee, it could well mean that you would be paying up to 4% interest. Although it is lower than a personal loan, it is not entirely 0% as you thought.
Meanwhile, there might be certain clauses in the deal that might mean the 0% interest is only applicable for a short period of time. It could be 0.5% for the next 6 months which means you only enjoy 0% for the first half year of the balance transfer.
Check the rates that are being offered. Some banks will have a different rate for different amount. You might not be owing a lot of money in your credit card but the bank will want to offer you 0% only if your debt is above a certain level. In some cases, there is a maximum amount you can transfer which means you could well be paying the 18% interest for the outstanding in your current credit card.
Discipline is everything
Ultimately, you need to be aware that when you enter into a balance transfer program, you are intending to clear your debts. Once you have completed the first phase where you have paid off the debt with 0% interest, then you need to be discipline enough not to incur additional debts again. If you have been able to pay this off, then you need to ensure that you are clearing your credit card debts in full from that month onwards.
The best advice you can get is to look at the best deals available by the banks. You want a bank that gives you 0% interest for the longest period of time. From there, you can then decide which bank to use. It is very easy to take one card’s balance transfer and then cover the debt or another and do this with multiple cards. But the danger is always there where you might be incurring more debts than before due to poor discipline of spending.