Your credit card bills have just arrived and you’re having a staring match with them. It’s evident there’s no escaping your piling debt and you’re wondering if this a lost cause.
And that’s when it hits you— a credit card balance transfer plan could be the solution to your problems!
With a balance transfer plan, you can transfer one or all your existing credit card debts into a new credit card account with more favourable repayment terms like an interest-free grace period or simply lower interest rates.
But there are a number of important things you need to consider before you take another credit facility. Like any other financial product, even a credit card balance transfer plan comes with its own set of advantages and disadvantages. So, would it be wise to take up a credit card balance transfer? Let’s find out.
Let’s first examine the benefits of getting a credit card balance transfer plan.
1. You save on interest
It gets increasingly difficult to clear your debts when you’re tackling high interest rates. A considerable amount of your repayments go towards the interest amount instead of the principal component. This is when a balance transfer plan may come in handy.
Certain banks offer a 0% balance transfer plan for 6 or 12 months. Clearing your dues within this period means avoiding high interest charges and saving a huge chunk of money during this period. The Alliance Bank Balance Transfer Instalment Plan, for example, offers a 0% plan for a 6-month period. With such a plan, you can focus on clearing as much principal component of your debt as possible within the grace period.
Similarly, the HSBC Balance Transfer plan also offers a 0% interest period for 6 months. However, you will have to pay a 3% upfront interest amount. Let’s say you have an outstanding balance of RM10,000. If you choose this plan, you pay RM300 as interest. This is considerably lower in comparison to standard interest rates available on a credit card which can range to 18% p.a. or even higher.
Besides 0% plans, there are other balance transfer plans with interest rates as low as 5% p.a. as well. These plans offer a repayment period of up to 36 months, giving you more time and flexibility to get rid of those pesky debts. Click here to know more about balance transfer plans in Malaysia.
Must read: 5 Useful Tips to Become Debt-Free
2. You can take advantage of better terms
The terms and conditions on your current credit card may be restricting you from clearing your debt quickly. It could either be the high interest rates or a shorter grace period. This is when it can be ideal to move your outstanding balances to a new credit card account.
3. Peace of mind guaranteed as you can consolidate all your debts in one place
One of the biggest advantages of a balance transfer plan is combining all your credit card debts into a single credit facility. It can get overwhelming and mentally exhausting to keep a track of multiple repayments every month. And if you miss a single payment, you risk higher interest rates, additional late fees and penalty charges.
Consolidating your credit card debt helps you focus on a single payment instead of several. You will also find it easier to plan your monthly budget. For instance, the Standard Chartered Balance Transfer Plus plan lets you transfer a minimum of RM1,000 debt and you can choose a repayment period of up to 36 months.
4. You get mental and emotional relief
When you’re swimming in debt, you’re under constant stress and pressure to get rid of it. The multiple repayments, the high interest rates, the penalty charges and late fees —all of these begin to take a toll on you.
But with a balance transfer plan in place, you won’t have to worry about all of those things. You know your debt is limited to one account, and this lets you focus on clearing a single bill each month.
Now that you know the pros of getting a credit card balance transfer plan, let’s dive into the pitfalls attached to it.
1. Your low credit score can affect your new credit card application
There may be multiple reasons behind you accumulating credit card debt and denting your credit score — late repayments, missed repayments, high outstanding balances, multiple credit facilities, maxing out your card and more. So when you want to apply for a new credit card to transfer your debt, chances are you might not qualify for it due to your poor credit score.
That’s why it’s important to keep a check on your credit score. If it’s below average, you’ll have to work towards improving it. Qualifying for a credit card with a higher credit limit can prove to be difficult with a low score. Remember, low credit scores also affect the Annual Percentage Rate you can get on a balance transfer plan.
Also, it’s vital that your new credit card should have sufficient credit limit to accommodate your existing debt. On top of that, in many cases, the issuer will not allow you to transfer debt amounting to more than 70-80% of the credit limit on your new card.
As such, a moderate credit score may be enough to get you a new card, but not with the expected credit limit which can house your entire debt amount.
Must read: 7 Useful Tips to Improve Your Credit Score
2. You can end up paying much higher interest rates
Even though balance transfers streamline your repayment schedule, you may incur higher interest rates post the promotional interest-free grace period. Once this promotional rate expires, the interest rate bounces back to a higher APR. This could end up pushing you further down in debt and make your credit card even more expensive.
To avoid paying higher interest rates, you should aim to repay all your dues before the promotional rate ceases to exist. So if you’re planning to transfer a large amount of debt to a new credit card account, be cautious. Let’s say you’re planning to transfer RM6,000 debt and the promotional grace period is for 6 months, it’s wise to opt for a balance transfer plan only if you can afford to pay off RM1,000 every month for 6 months.
Related: A 7-Step Guide to a Debt-Free Life
3. You risk hurting your credit score further
So congratulations if you were able to transfer your entire debt to a new credit card with more favourable terms. But if you miss out on the payments, you’ll damage your credit score further for sure. This will also impact the approval rate of your future financial product applications.
So it’s very important for you to choose a credit card whose limit can accommodate as much as your debt amount as possible, and you have the required discipline to repay off the instalments in full on time. Otherwise you’ will pile up more debt (especially after the interest-free grace period ends) and will hurt your credit score further.
Besides these pluses and pitfalls, there are other things you should keep in mind before triggering a credit card balance transfer.
1. A balance transfer doesn’t mean you’re free of debt!
It’s superlatively important for you to realise that a credit card balance transfer isn’t a solution to your debt problem in itself. It just gives you some extra breathing space (with its interest-free grace period or lower interest rates) to help you get rid of your debts faster. That means if you don’t have proper debt-reduction strategies and financial discipline in place, a balance transfer may not help you achieve freedom from debt — worse, it may actually worsen your debt problem!
2. You’ll be charged additional fees
While your old credit card may have no annual fees, opting for a balance transfer plan does involve certain fees. For starters, you’ll be charged with a processing fee when you’re transferring your dues from your old card to the new one. Some banks charge you an upfront interest amount, especially if you’re choosing a 0% interest balance transfer plan.
That said, some banks don’t charge any fees when you transfer your outstanding balances. For instance, the Citibank Balance Transfer plan doesn’t charge any processing or upfront fees.
If you decide to settle your debt before the interest-free term ends, some banks will charge you an early settlement fee as well. You’ll be well-advised to do your research and keep all these additional fees in mind before settling on a new credit card and its balance transfer plan.
And your new credit card may come with annual fees which may or may not be waived.
3. You can transfer only a limited amount
Let’s say you have an outstanding balance of RM10,000 on your old card. Even if your new credit card has a limit of RM10,000, you cannot transfer all your dues as many credit card issuers do not allow transfer of debt amounting to more than 70-80% of the new card’s credit limit.
So it’s very important to consider the credit limit of your new card which can accommodate a major chunk of your existing debt if not the full amount.
4. You have to avoid spending on your old cards
You may get tempted to go on a shopping spree with your old cards once you’ve transferred their debt to a new card. But you have to resist this temptation because you’re still in debt. Until you’ve gotten rid of your debts, you have to be disciplined about your spendings.
5. Consider reaching out to your current bank for better terms
Many financial experts point out that before triggering a new balance transfer plan, you should always reach out to your existing bank requesting them to relax the terms and conditions associated with your outstanding credit card debt. You can explain your situation, why you’re finding it difficult to repay their dues, and appeal for a lower interest rate along with a penalty and late fees waiver.
Chances are, they might agree to your request based on your relationship with the bank and reconsider the terms and conditions (at least to some extent). This will save you from the hassle of applying for a new credit card that can accommodate your debt on favourable terms.
There’s no guarantee that such a strategy will work, but there’s no harm trying, isn’t it?
6. Compare your options
Well, comparing different options thoroughly before zeroing in on a card whose balance transfer plan is best in line with your debt reduction goals and affordability among other considerations is extremely important. To start with, do check out our list of top balance transfer plans, and our picks for best balance transfer credit cards in Malaysia.
Conclusion: Hope our tips will help you make informed financial decisions when it comes to credit card balance transfer plans. Remember, if you have complete clarity on interest rates and tenures, clear debt reduction goals and financial discipline, a credit card balance transfer will indeed help you achieve freedom from debt and do a world of good to your credit score as well. But it’s very important to tick these boxes before triggering a balance transfer plan.
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