Transferring your mounting credit card debt to another one at a lower, sometimes even zero, interest rate is a relatively good way to manage the escalating finance charges that’s costing you a bomb
Before you rush out to sign-up with the latest and greatest zero interest balance transfer plan, we’ll let you in on a little-known secret.
Hidden in each bank’s open secret language are the words flexible and instalment. We say this because it’s often not obvious at first glance what kind of plan you’re getting yourself into.
So what are they really?
Balance transfer flexible plan
What is it? A flexible plan that gives you the flexibility to determine how much you would like to pay every month, as long as you make the minimum 5% payment. The remaining balance will attract interest at specific rate throughout the stipulated period. After that, all bets are off and you will go back to paying the normal (exorbitant) rate.
Type of interest rate: Typically compounding. This is consistent with how banks calculate your normal interest charges.
How to identify a flexible plan: These are the usual suspects that banks employ, although it’s not easy to pinpoint them outright. If you see a bank displaying savings table with interest amounts that are up to the odd cent, you’ve got your culprit.
Beware of: The order of your card repayment (also known as payment hierarchy). Depending on the bank, any repayment that you make towards your credit card debt may go to paying the least expensive debt first (in this case, it would be the amount you transferred).
Once that is cleared, only then will your payment be applied to any spending that you’ve charged to your card. By then, you would have racked up a fair bit of interest charges on your expenses at normal rates, so avoid spending with this credit card!
Choose this if:
● Your monthly income varies and you’re not sure how much you can commit to paying on a monthly basis
● You don’t plan to use this card for your usual spending
Find out how much you can save with balance transfer.
Balance transfer instalment plan
What is it? An instalment plan that fixes the amount that you need to pay the bank every month. You may be required to pay off the interest upfront in the first month, or it may be divided across your instalment period evenly. No surprises here, but no deviation or flexibility is allowed either.
Type of interest rate: Typically flat interest rate. The total amount of interest that you pay would be interest charged per month x instalment period (in months) x amount transferred.
How to identify an instalment plan: Look for “instalment” (obviously!). Usually also seen with the words “fixed” or “flat or one-off interest rate”.
Beware of: Interest on unpaid instalments. If you do not make your monthly instalment in full, the unpaid balance of your monthly instalment may attract the normal rate charges.
Choose this if:
● You are confident that you are able to make the monthly instalments
● You don’t want the hassle of having another card for your usual spending (and incurring another RM50 on service tax!)
Note: Remember that even though this mechanism can be a good way to minimise your debt, it can also work against you. So, make sure you stick to your payments.