balance transfer

Balance transfer - what you should know

Let face it, we all have credit card debts. Whether it’s due to over indulgence (maybe you couldn’t resist that nice pair of shoe too many times or a nice Omega watch on sale). The fact is more and more people are carrying credit card debts, the most expensive form of debts. It’s no wonder that there are so many “balance transfer” offers out there. Some offer 0% interest for 6 months, even 12 months. Others will offer you very low interest for the life of the balance transfer, like Citibank’s Ready Credit offering 6.99% for life, sound like a very good deal isn’t it? What’s in it for the bank then?

Yes it is a good deal if you know how to take advantage of it, and you need to know the “traps”. After all, the banks got to make money.

How do Banks makes money from these offers? Well Banks are banking on you replacing your old card with the new shiny card they issued you. Why is that bad for you? You see, when you “balance transfer” to a new card and use the same new card to make purchases just the way the banks wants you to, you will have two running balances, one is the “balance transfer” amount, and the other is the “purchases” amount. The interest charged on the balance transfer amount is whatever the promotional rate is, be it 0 or 6.99%. The “purchases” amount on the other hand is charged at the standard rate, could be anywhere between 10% to 21% depending on which card.

If you read the fine print, you’ll realise that all repayments you make will go toward paying off the cheaper “balance transfer” amount first! Meaning you’re reducing the cheaper part first while the more expensive part of the balance is sitting there accumulating high interest daily!

Another trap is card with different rates for purchases and cash advances, e.g. the Bankwest Zero MasterCard have a purchase rate of 15.99%, but the cash advance rate is over 20%, plus a cash advance fee!

With some balance transfer promotion, if you don’t pay off the whole “transfer amount” by the time the promotion discount period is over, e.g. 6 months or 12 months, the bank will start charging you interest based on the cash advance rate rather than the purchase rate, therefore you will be paying something like 20% until the balance is paid off while enjoying discounted interest only for 6 to 12 months. That’s how the bank makes money off these sorts of offers.

So those are the common traps, how do you beat the bank at their own game then?

Follow these steps:

1. Never balance transfers to a card that is already carrying existing purchase or cash advance debts - pay it off first, then balance transfer.

2. Once you balance transfer to another card, put that card away (the one you just balance transfer to) and don’t touch it! Make your repayments and clear the debt off as soon as you can. If you have multiple debts, pay off the higher interest one first.

3. Don’t cancel your old card, hopefully you were able to transfer the whole balance to another card, leaving the old card nil balance. Continue to use the old card for your day-to-day expenses and try to clear the balance off every month to avoid interest and not falling into the same debt again.

4. Look for “for life” offers, with this offer you pretty much got the low rate until you pay it off. Currently, Citibank Ready Credit is the only one that’s offering “for life” balance transfer at 6.99%. Again once you’ve balance transferred to a “for life” offer, don’t use that account again. Be very disciplined, because if you balance transferred and use the same card to make purchases, you’re doing exactly what the banks wants!

5. Know your financial position, are you going to pay off the balance by the time the promotional period is over? Obviously, if you are transferring to a “for life” promotion, then that’s not so much of a problem, if you’re transferring to a 6 months 0% interest promotion, make sure you understand what happen after the 0% interest period is over. What interest rate will be charged after the promotional period ends? Will you have to funds to clear the balance after the period ends?

6. Finally, never apply for more than one credit card a year. Every application you make will be recorded on your public credit files. This will adversely affect your credit rating.

The best thing to do is not to have credit card debts, but most of us don’t have that option.
However, you can be smarter and save thousands in interest a year if you spend a bit of time researching and take advantage of the low interests offers out there.