High credit card usage can put you in financial trouble. According to Credit Counselling and Debt Management Agency (AKPK), 55% of its debt portfolio is made up of credit card loans.
If you’re struggling with credit card debt, one of the solutions you can turn to is a balance transfer plan. Ironically, this involves clearing off your credit card balances…with another credit card. This can be a good tool for saving on interest payments, but it must be wielded cautiously.
What is a balance transfer?
A balance transfer plan helps you transfer your debts on an existing credit card to another credit card at a new bank, at a lower interest rate starting at 0%.
However, the lower interest rate is only applicable for a promotional tenure (e.g. 6 or 12 months). This means that you’ll have to clear your debts on your new credit card within a short amount of time to enjoy the lower interest rate, otherwise your balance will be charged at the prevailing interest rate, which can be around 15%.
How can a balance transfer help you save money?
A balance transfer’s lower rate helps you save money, because you’ll get to pay lower (or zero) interest on your balance during the promotional period. Let’s look at an example:
| Without balance transfer | With balance transfer | |
|---|---|---|
| Balance | RM10,000 | RM10,300 (balance + 3% upfront fee) |
| Interest rate | 18% | 0% |
| Monthly payment | RM957.58 x 12 months | RM858 x 12 months |
| Total payable | RM11,491 | RM10,300 |
| Savings | RM1,191 |
In the example above, instead of paying a 18% interest rate on your balance, you’ll be paying a 0% interest rate. This saves you around RM100 a month, or RM1,191 in a year.
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If you’ve already compared the plans offered by different banks and have done the math to know that this can benefit you in the long run, here are the steps you’ll need to take.
| Step 1 | Make at least the minimum payment on your latest bill. |
| Step 2 | Visit your new bank with a copy of your latest credit card statement. Create a plan to pay off the balance you are transferring over with the staff who is assisting you. Make sure you understand all charges, interest rates and terms. Sign up for your new card and complete the balance transfer form. Alternately, you can do this online. Check your new bank’s website for details on how to apply for a balance transfer. |
| Step 3 | While waiting for confirmation from your new card company, make sure you continue to make at least the minimum payment on your old card during the due dates. |
| Step 4 | Receive confirmation of your new account and a notice of the balance transfer. |
| Step 5 | Check that the amount transferred is reflected on your old account. If you’ve transferred everything to your new card, the latest statement on your old card should have zero balance. |
| Step 6 | If needed, terminate your old card. But make sure you understand how it can affect you. |
| Step 7 | Your balance transfer has been a success. Continue paying monthly instalments to your new card to avoid any nasty surprises! |
Watch out for these balance transfer fees
While a balance transfer can sound like a good idea, you’ll want to watch out for these fees that can offset your interest savings:
- Upfront fee: Some banks charge an upfront fee of up to 3% on your balance. This varies depending on your bank and tenure. A 3% upfront fee means that if you transfer RM5,000, you’ll have to pay RM150 in fees.
- Late repayment fee: You’ll need to pay a minimum monthly instalment (typically 5% of your balance), otherwise you can incur a late repayment fee (can be around 1.5% a month).
- Early settlement fee: If you clear off your balance before the tenure ends, your bank may impose an early settlement fee, which will vary depending on your bank. It’s best to check with your bank how much this will cost before you clear off your balance.
A balance transfer is not for everyone
You should only take up a balance transfer if you can pay off your balances within the tenure, or you would incur late repayment fees. Besides that, the lower or 0% interest rate is only applicable for the promotional period of the tenure. It’s important to pay more than the minimum monthly instalment every month, so you can clear your balance within the tenure – otherwise, you would incur the prevailing credit card interest rate, which can worsen your debt situation.
On the other hand, if you are financially disciplined and you can afford to pay off your balance within your tenure, a balance transfer can help you reduce your interest repayments. For some people, this can be a good way of dealing with short-term debts.
This article was first published in 2013 and has been updated for freshness, accuracy and comprehensiveness.
