Balance Transfer: What Is It and How Does It Work?

This was originally posted on Planner Bee.

Have you ever found yourself overwhelmed by high interest debt? Or are you looking for a solution to tame your debt and save on interest payments?

Credit cards offer a convenient way to make purchases, but they can also lead to a cycle of high interest debt. If you’re struggling with balances on multiple cards, a balance transfer can be a strategic option to consider to help you streamline your debt repayment process.

In this comprehensive guide, we’ll explore the intricacies of balance transfers, from how they work to their potential benefits, risks, and strategies for maximising their effectiveness.

What is balance transfer?

At its core, a balance transfer involves shifting your existing high interest credit card debt from one card to another card, with 0% interest or ideally 0% interest, for a set period.

The primary goal is to temporarily pause the interest accrual on your transferred balance, giving you a crucial window to pay down the debt without the burden of compounding interest.

Read more: Mortgage 101: What is Loan Tenure, Loan To Value (LTV), and Income Weighted Average Age (IWAA)?

Mechanics of a balance transfer

Here’s a breakdown of a typical balance transfer process:

1. Identify a balance transfer card: Look for credit cards offering introductory 0% APR (Annual Percentage Rate) on balance transfers. These offers typically range from 6 months to 21 months, with some extending to even longer durations.
2. Apply for the transfer: Submit a balance transfer request to the new card issuer, specifying the amount you want to transfer from your existing card(s).
3. Approval and transfer: Once approved, the new card issuer will pay off the balance on your old card(s) up to the approved limit. The transferred amount then reflects as a balance on your new card.
4. Transitioning after the offer: Before the 0% APR period expires, strategise how you’ll handle the remaining balance. Ideally, you want to have it paid off entirely before interest charges resume. If not, consider transferring the remaining balance to another card with a lower ongoing interest rate or explore debt consolidation options.

Why choose balance transfer?

There are several compelling reasons why balance transfers can be a gamechanger in your debt repayment journey. The most significant advantage is the 0% interest on the transferred balance. This allows you to channel all your payments towards the principal amount, accelerating your debt payoff.

Also, by consolidating your debt onto a single card, you streamline your payments and avoid juggling multiple minimum payments and due dates. This also makes it easier to track your progress towards debt freedom.

Note: Balance transfer only provides you the flexibility of repayments. Ultimately, you are still required to clear your debt.

Last but not least, paying down debt can positively impact your credit utilisation ratio, which is the percentage of your available credit limit you’re using. A lower credit utilisation ratio is a positive factor influencing your credit score.

Things to note

Balance transfer can be a powerful tool when used correctly. Before proceeding, here are some pointers to take note of:

1. Balance transfer fees: While the 0% interest is enticing, be mindful of balance transfer fees. While some issuers offer promotional periods with no transfer fees, others may charge a percentage of the transferred amount. These fees can range from 1% to 5% of the transferred amount and are typically a one-time charge.
2. Minimum payments: Don’t fall into the minimum payment trap. While you won’t incur interest charges during the promotional period, prioritise paying more than the minimum amount to make a significant dent in the debt before the introductory period ends.
3. Regular rates after promotional period: Understand the regular Annual Percentage Rate (APR) that will apply to the transferred balance once the promotional period ends. This rate can significantly impact your interest payments if the balance is not fully repaid within the promotional period.
4. Late payment policies and penalties: Understand the late payment policies of both the old and new accounts. Missing a payment on the new account can result in penalty fees and potentially trigger the end of the promotional period, leading to higher interest rates. Additionally, late payments can hurt your credit score, diminishing the benefits of the balance transfer.
5. Alternatives to consider: Balance transfers might not be the best solution for everyone. Explore other options like debt consolidation loans, which can offer lower interest rates and potentially longer repayment terms. Consider your financial situation and choose the option that best suits your debt repayment goals.

Balance transfer rates in Singapore

Here is a quick comparison of the rates offered by different institutions in Singapore:

• Rates are obtained from the respective official bank websites and are subject to changes. ** EIR: Effective Interest Rates

Difference with personal loan

One key difference between a balance transfer and a personal loan lies in the nature of the debt consolidation process.

While both options aim to streamline debt repayment, a balance transfer involves transferring existing debt from one credit account to another, typically a credit card or line of credit, often with a promotional low or 0% interest rate for a limited time.

In contrast, a personal loan entails borrowing a lump sum of money from a financial institution, which is then used to pay off existing debts.

Personal loans typically have fixed interest rates and repayment terms while balance transfers may offer promotional rates and potential savings on interest payments. Balance transfers tend to have a lower tenure from 3 to 12 months, which is suitable if you have the capacity to repay the debt within a shorter period. On the other hand, personal loans offer the certainty of a fixed repayment schedule and may be more suitable for individuals seeking long-term debt management solutions.

Read more: Debt Settlement in Singapore: What Are Your Options?

The bottom line

Balance transfers can be a strategic tool to help you take on credit card debt and accelerate your journey to financial freedom.

Don’t be afraid to leverage budgeting tools or explore alternative debt management strategies. With dedication and a proactive approach, you’ll be well on your way to achieving financial stability and paving the path to a secure future.

Remember, responsible credit card usage and a commitment to living within your means are crucial for long-term financial success.