What Is Balance Transfer?
Balance transfer is a method of transferring your credit card debt from one bank to another. It means a new bank buys your debt from the bank you currently owe and offers a lower annual interest rate or no interest rate charged.
Why Do Balance Transfer?
Because the introduced interest rate is lower! The typical credit card interest rate charged by credit card issuers is 18% per year or 1.5% per month. Before choosing a balance transfer offer, make sure you check:
- Annual/monthly interest (for transferred amount)
- Upfront fee (for transferred amount)
- Annual Fee (for the chosen credit card)
- Exit fee / penalty (if you want to make an early settlement before the end of the term)
Various offers are provided by credit card issuers. Some credit card issuers don’t charge any interest rate but charge 3% of the credit card debt balance as an upfront fee.
Apart from the upfront fee, some credit card issuers charge a minimum annual fee of RM 50, and usually we’ll get two cards, a Mastercard version and a Visa version credit card. The total annual fee for two cards alone reaches RM 100.
An exit fee will also be charged if we make full payment earlier than the agreed period between us and the credit card issuer.
For balance transfer, the payment term contract introduced is usually for 3 months, 6 months, 9 months, 12 months, 24 months or 36 months depending on your choice.
Credit card issuers also set a minimum amount of credit card debt eligible for balance transfer. Usually, the minimum amount is RM 1000.
Application Process
- Apply for a credit card at your chosen credit card issuer.
- After getting the credit card, apply for Balance Transfer. You can refer to the credit card issuer company staff if you have any questions.
- Several documents are required for the balance transfer application and generally, credit card issuers require:
- Copy of identification card
- Credit card debt statement
- Then, wait for the credit card issuer to contact you.
Debt Savings With Balance Transfer
How much debt savings do you get when doing a balance transfer? Let’s look at the situations below:
Situation 1: Pay Credit Card Debt Installment At Minimum Rate
Aidil has a credit card with an outstanding debt of RM 10,000 with a rate of 18% per year. If Aidil pays the credit card debt installment with the minimum amount, which is 5% of the debt balance or RM 500 per month.
Aidil will take 89 months (7 years 5 months) to settle all debts (refer to the image above).
- Annual fee for 2 credit cards for 8 years: RM 50 x 2 cards (Visa Mastercard) x 8 years = RM 800
- Interest: RM 4056
- Total payment including interest: RM 16,026
- Grand total: RM 16,026 + RM 800 = RM 16,826
Situation 2: Pay Credit Card Debt Installment With Balance Transfer
Aidil has a credit card with an outstanding debt of RM 10,000 with a rate of 18% per year from credit card issuer A. He then makes a balance transfer to credit card issuer B with the following conditions:
3% Upfront Fee is charged during registration and added to the credit card debt balance. The total upfront fee is RM 300.
At this point, the debt balance to be paid is RM 10,300.
The credit card issuer offers that if all debt balance is settled within 12 months, no interest rate is charged.
For the first 12 months, the monthly installment to be paid is:
RM 10,300/12 months = RM 858.40
An annual fee is also charged on the new Master Card and Visa credit cards at the rate of RM50 per year for one card. The total payment is RM 100 and must be paid immediately when applying for the new credit card.
In conclusion, Aidil’s total debt with the new credit card issuer is RM 10,400 (RM 10,300 + RM 100) and the monthly installment to be paid is RM 858.30.
Aidil has saved:
RM 16,826 – RM 10,400 = RM 6,426
