What is a balance transfer credit card?
- A balance transfer credit card is a facility that involves transferring your current outstanding credit card debt to a new credit card which offers either a very low or even 0% interest rate. So the idea is for you to consolidate all of your credit card debt into one credit card that offers you a much lower interest rate.
- Your payments will then go directly to the principal amount which you owe instead of you having to pay for more interest on top of the money you owe.
- Balance transfers are usually offered over a time frame between 6, 9, 12 or 36 months for repayments.
- However when choosing a longer time frame, such as 36 months, you would not get the 0% interest rate, but the interest rate will still be comparatively lower than the original interest rates on your previous credit card.
|The advantages of a balance transfer
|Why choose balance transfer?
- Low interest rate - The main advantage of a balance transfer is the low interest rate or 0% interest rate depending on the amount of your transfer and the time frame for repayments. This will then provide you with lower monthly payments by consolidating all your credit card debts under one card.
- Pay less monthly installments - For example: Sarah is currently paying RM10,000 on a credit card with an 18% interest rate. With a balance transfer to a credit card that charges 0%, or even one that charges 3% interest rate, she will be paying less on her monthly installments as a result of the lower interest rate.
- Clear off debt faster - Aside from the lower interest rate, a balance transfer will also help you to clear off your credit card debt faster because of the reduced charges incurred.
- Improve your credit score - This means that a balance transfer can provide you with a solution to clear off your credit card debt. Additionally, you can also improve your credit score with balance transfer, however this is provided you fulfill your monthly obligations diligently and promptly of course.
Things to look out for
- Before you get excited there are a few important things you need to take note of so you don’t mess up the chances of clearing off your credit card debt. First up, make sure you’re aware of the details entailed.
- For example a card may say they offer 0% for balance transfer but the fine print then states that for the first 6 months you get to enjoy 0% and then for the subsequent 6 months you will actually be charged 0.6% interest. So you need to know you will not get 0% interest rate on your transfer for a whole year with some cards, and definitely read all the fine print.
- Next, you need to make sure you don’t make late payments because the charges would be exorbitant! That’s not the only bad thing to happen when you make late payments, as your credit card issuers could also revoke the promotional low interest rate on your balance transfer card if you fail to clear your debt during the allocated time. You will then end up paying higher late payment interest which usually is calculated based on the 18% interest rate.
- There are also charges involved when you opt for a balance transfer such as upfront fees and balance transfer fees. Certain cards will also stipulate a minimum transfer for specific repayment periods. The time period and amount may also dictate if you do or do not get 0% interest rate. You should also know that the 0% interest rate is only for the amount transferred.
- Additionally, the 0% interest promotional rate is only for your transferred balances. As for the new purchases you make using the card, you will still be paying interest on it, so make sure you don’t swipe your card on your shopping spree thinking it will be 0% interest rate.
- Lastly, there is also a maximum cap per transaction depending on your credit card issuer along with the amount of balance transfer amount. This means that some credit card issuers will allow you to transfer balance from up to three other banks at one time, but a different bank may only allow transfers from two banks. So do take note that total amount may differ between credit card issuers.
- Balance transfers can help you to clear off your debt at a low or even 0% interest rate but this is of course if you make sure you stay on top of your payments and be diligent with your payments.
Additional things to note about balance transfer credit cards in Malaysia
A debtor should be aware of the following points before transferring their balance to a different credit card.
|Key features on balance transfer credit cards
|Credit Card Limit
- There is usually a cap that a debtor can transfer to another credit card. This cap depends on the credit limit of the new credit card.
- To illustrate; A debtor has RM10,000 debt in Credit Card A and the credit limit in the new card, Credit Card B, is only RM8,000.
- The debtor can only transfer a maximum of RM8,000 from his Credit Card A to Credit Card B.
- Certain credit cards allow Balance Transfers at no fee charged but there are also banks that would charge a transfer fee or processing fee.
- Such fees are usually a percentage of the transferred amount.
- The fees might not be a huge dent to one’s wallet but it is definitely something to take note of to avoid surprise charges.
|Closure of old account
- It is a misconception that a Balance Transfer process automatically closes the account of the old credit card.
- This is not the case and a credit card holder will need to manually deactivate the old credit card if they do not want to use it anymore.
- It is advised for credit card holders to ring their banks and cancel their old credit cards to avoid unnecessary charges like GST charges and annual fee charges.