Balance Transfers are most useful when you are trying to rid yourself from the debt of a high interest credit card by transferring the balance to a low interest credit card. Although this sounds very enticing, in reality, the process is not as simple as it is made to sound. There are a lot of aspects that are still unknown by many customers who have used the balance transfer facility in the past, who are currently using and those who are on the brink of using it.
Following are the aspects about balance transfer facility that you must know in order to benefit the maximum from it –
When you choose to transfer the credit from one credit card (most often from a higher interest card) to another credit card (most often to a lower interest credit card), what you are actually doing is paying off one credit card using the other credit card. What you must understand is that you will reap the real benefit of the balance transfer in the long run when you start making your payments on the balance transfer facility availed. In the short run you will have saved yourself from making high interest rate payments on your card. The truth is that you will continue to make payments but at a lower rate if interest on your transfer. The savings you will earn from this transfer will only be recovered in the long run.
A great reason to choose balance transfer is that you can consolidate all your other bills in a single card allowing you to make one payment every month without the hassle of worrying about multiple bills. When you have multiple credit cards and several additional bills, it becomes very difficult to keep a tab on all of the statements and even more tedious to pay separate bills. Minimum payments due and payment dates can be confusing and if you forget one or two payments, it will affect your credit score adversely. Under such circumstances transferring all our credit debt into one single low interest credit card can save both, time as well as money. This way you will only have one card that you will have to monitor and keep track of your payment amounts and payment dates so you don’t miss it.
Using the balance transfer facility, it is not necessary that you can only transfer your credit card debt, you can also transfer other debts such as a loan on your home, car or any other monthly installment payments you are currently making. By transferring all your debts to a zero interest balance transfer card, you can save plenty on your interest.
A balance transfer facility is not merely transferring your debt from a high interest credit card to a low interest one and other additional monthly instalments due. It goes beyond that. When you use the balance transfer facility, you will be charged a balance transfer fee. This fee will be determined on the basis on the amount that you transfer. Do not confuse the balance transfer fee with the interest charged. Both of these are separate components involved in a balance transfer. The bank may offer you a bank transfer facility with 0% interest as a promotional offer for a specific period of time. However, you will still be paying the fee for using this facility during this time. Previously, there was a cap for the balance transfer fee. The scenario has changed today because now the more you transfer, the higher the transfer will be. The balance transfer fee is charged a percentage value of the amount you transfer. For example if the balance transfer fee is 3% and you transfer SGD 10, 000, then your balance transfer fee will be SGD 300. Therefore, depending on the fee, you can decide if it is worth it to transfer your balance to a particular bank because at the end of the day, the point of a balance transfer is saving money.
You may get swayed with the extremely low and cost effective rates and fees at which a bank is offering you their balance transfer facility. But you must be careful because more often than not, these are promotional rates or teaser rates that are in effect only for a short period of time. For instance, many leading banks in Singapore are offering balance transfer at 0% interest rate. However, this promotion is only valid for the first 6 months after which you will be charged an interest rate. The interest rate will most definitely increase after the initial months of enjoying teaser rates, sometimes, the rates are even higher that what you were charged on your high interest credit card which was the whole reason for you to switch you payments to the balance transfer. Therefore, it is very crucial at this stage to not make a misstep here. Choose your balance transfer wisely and more importantly, once you have made your choice, do not start lagging behind on your payments as these interests will cost you your savings.
The promotional rates or teaser rates that you enjoy on your credit card balance transfer facility may only be applicable on the purchases / payments / instalments that you have transferred. New purchases made on your card may not qualify for the interest free / promotional / teaser rates, even if you have made these purchases after having applied for a balance transfer and have been made aware of the attractive interest rate package. It is very important for you to read the terms and conditions of the promotional / teaser rate on the balance transfer you have chosen before you start using this card for all your purchases assuming you are enjoying the same rates as your transferred balance on this card. There are however, some balance transfers offered by banks that provide the introductory rates even on new purchases for a specific period of time. Other banks charge a higher APR on new purchases. The banks do not necessarily communicate this to you, thereby making it your responsibility to find out yourself.
If you have a certain introductory rate for your balance transfer and a different, higher interest rate on your new purchases, you cannot tell your card issuer how to apply the rates on your payments as these payments are already allocated. Due to varied interest rates applied to different purchases on your balance transfer card, you may be charged a dual interest rate. Hence, it is better to avoid using your balance transfer card for making new purchases if the interest rate varies for both.
It is very simple to assume that you can save significantly if you keep switching your balance transfer facility to continue enjoying the promotional or teaser rates that many card issuers provide when you apply for a new / fresh balance transfer facility, however, do make this mistake to repeating your transfers to enjoy these rates because they will have an adverse impact on your credit score. Repeat transfer damage your credit score because through this process you will continue to have open low interest accounts but your overall debt will not decrease making lenders see you as a risk as you are opening multiple balance transfer facilities but you are unable to maintain your high level debt which will make it extremely difficult for you to get any financial service from a bank or financial institution.
The best terms on a balance transfer facility and the most attractive packages with 0% interest on the balance transfer are today made available only to those customers who have a good credit score and preferred customers. Therefore, you can save significantly through the balance transfer facility if your above average credit score qualifies you for the best rates offered by your lender. Otherwise you might save as much you thought. Either way, a balance transfer can help you get rid of your debt faster and much more conveniently.
These pointers can come in handy when you apply for a balance transfer now that you know every aspect regarding it, the positives as well as the pitfalls. Using this new information, you can now maximize your savings by transferring all your other debts to a low interest credit card using the balance transfer facility and even enjoy this facility at lower interest rates and a nominal balance transfer fee. However, there is no shortcut of ridding yourself of your debt. A balance transfer does not mean that once you have transferred your balance, your debt situation has improved. You will need to continue making your payments on time to get the maximum use out of this facility and out of your debt faster. A balance transfer is merely an instrument helping you to settle your debt in a more organized, convenient and fast manner with greater savings than making individual payments at a higher rate of interest.