Credit Card Balance Transfer: 3 Common Pitfalls to Avoid
The credit card balance transfer programme is a popular short-to-mid-term option that can help reduce the amount of interest you are paying for your credit card debt. But as much as it can help you get out of a sticky situation, the process may actually cause more problems if it is undertaken without proper considerations.
For those who are actively considering taking on the balance transfer programme, here are some common pitfalls that you should know of before you sign on that dotted line.
1) Thinking introductory interest rate is for life
For the inexperienced or uninitiated, you might think that the ultra-low or 0% introductory interest rate you receive when you initiate a balance transfer is for life – it is not.
The truth is, you only get to enjoy introductory interest rate for a fixed period of time, usually just for a few short months, before you revert to the standard interest rate. So, if the standard interest rate of your new card provider charges is significantly higher than your existing one, you may find yourself paying more in the long run.
If you are completely sure you can clear all the debt before the end of the said period, then it is a good option to take.
2) Forgetting to factor in balance transfer fee (and other charges)
When your attention is captured by ads screaming “0% interest rate”, sometimes, it is easy to overlook the fact that certain card issuers charge you a one-off fee.
If you’re transferring RM50,000 of outstanding balance from Card A to Card B who charges a 3% balance transfer fee, you’ll be racking up an additional RM1,500 in debt the moment your transfer is approved. This does not include other charges like annual fee, which might have been waived by your previous card. Without a clear cut repayment strategy, all these miscellaneous charges could just come back and haunt you one day.
Find out how much you can save with balance transfer.
3) Terminating your old card as soon as you transfer your balance
Arguably one of the most common pitfalls because many people immediately terminate their old card as soon as they transfer their balance to a new one; forgetting that they are still reliant on a credit card to make their future purchases.
To understand how this could be a problem, know that the ultra-low or 0% introductory interest deal you’re getting usually covers only the balance you’ve transferred over, and not the purchases you’ll be making on your new card.
In fact, it is pretty common to get charged a significantly higher interest rate for new purchases to “offset” the attractive introductory rate you’re getting from your new card.
Now imagine a sudden emergency that requires you to swipe your card at this new, less attractive interest rate, and you’ll see how it can make your debt situation worse. In a nutshell, don’t be too hasty in cutting your old card in half just yet!