Balance Transfer – A Neglected Feature of Credit Cards
Being a credit card-holder, you may have already seen the term “balance transfer” in the credit card brochure or marketing collateral sent to you. But do you know what it is used for? In other countries like the United States, balance transfer is a feature that many cardholders are already familiar with, but in Singapore, it seems that its usage isn’t as common.
What is Balance Transfer?
Balance transfer facility is a feature that allows you to transfer the balance/debt of one card to another credit card that offers a lower interest rate. Most people use it as a way to consolidate all their debts under one card so that it can be easier to track, and as a way to reduce the overall interest payments required compared to paying it all off individually.
Common features of balance transfers include:
- Low or no Interest rate period: Transferred balances usually benefit from a low or 0% interest-free period of at least 6 months.
- Processing Fee: Applicants will need to pay an upfront balance transfer fee of 2% to 5% of the balance amount being transferred. Usually the longer you sign up for, the higher the processing fee.
Just talking about its features may not be enough to show you its benefits, so we shall illustrate with an example here:
Say you currently have a statement balance of $5,000 on credit card X. Based on current interest rates or 26% p.a, you’ll be paying a total of $$650 on interest payments alone at the end of 6 months. What you can do is to transfer this amount to another credit card such as the ANZ Switch Platinum card with a 6-month 0% interest rate promotion. By doing this, you get to:
- save a total of $650 off your interest payments
- lower your credit utilisation ratio for credit card X
Other Things to Consider about Balance Transfer Facility
One important factor that makes using balance transfer useful for the cardholder is the ability to pay back the amount within the interest promotion period. Based on the above example of $5,000, you’d need to be able to pay back $833.33 per month. If this amount of debt per month is hard to service, you’d need to consider what happens when the promotion ends.
Beyond promotional rates, the usual interest rates for credit cards or cash advance will apply after that. If those rates are higher than what credit card X was charging, then it may not make sense for you to use the balance transfer facility at all. You may end up incurring more fees and interest payments compared to not using it at all!
However, if you can ensure diligence in paying off the money within the promotional period, then using this service can be a pretty useful tool to help you save quite a bit of money.