How to take advantage of zero percent balance transfer credit cards

A BALANCE transfer is a short term loan. You take the debt you have on one credit card and transfer it to a credit card of a different bank.

Banks offer a very low-interest rate on the balance transfer as a benefit. Assume you currently have RM10,000 in debt on your credit card and you pay 18% per year, a balance transfer programme could save you up to RM 1,800 in a year.

Banks promote balance transfers for two reasons. 

First, they hope you will start using their credit card more. Many Malaysians have multiple credit cards but only use one for 90% of their transactions. Banks offer balance transfers in the hope to become “top of wallet”. 

Second, once the low-interest rate period is over, the bank will start charging you a high – as high as 18% per year – interest rate, provided you have not paid down the debt.

There is nothing wrong with banks vying to be “top of wallet”. A balance transfer can be a very affordable “bridging loan” to buy you time to pay off your debt, and it is quicker and cheaper to secure than a personal loan. 

Here are 10 tips that ensure you will take advantage of 0% balance transfers, instead of the other way around.

First, remember that balance transfer only works if you take a credit card from another bank. A second credit card from the same bank doesn’t work, because there would be no advantage in it for the bank, only costs.

Second, you need to pay attention to the period that the low-interest rate is offered. Although banks offer anything between three to 36 months, the most common period is 12 months. The longer the tenure, the higher the interest rate will be. 

If your credit card debt is sizeable, it may make sense to forego the 0%, six to 12 months’ balance transfer and opt for a low-interest rate (typically 2%-5%) for 18 or 24 months to buy yourself more time.

Third, you need to make sure you will pay off the debt before the low-interest rate period expires, because once it resets to the standard 18% per year, it will be more expensive than a personal loan. Always have a plan on how you are going to pay off the debt.

Fourth, don’t be blinded by a 0% interest rate on your balance transfer, but look at all costs involved. Some banks charge up to a 3% “administration” or “processing” fee in order to still get compensated for the balance transfer. A 3% fee on a six month 0% balance transfer equals a 6% interest loan, which is still quite low for a personal loan, but definitely not “free”. 

Some balance transfers have “teaser rates”, which increase halfway through the tenure. For example, you can see promotions for a 12 month, 0% balance transfer only to discover the 0% applies to the first six months, and you are charged 0.3% per month for the next six months.

Note that some of the balance transfer programs have interest rates as high as 6.99%, which means they are virtually identical in terms of interest rate to a competitive personal loan. There might also be early settlement fees involved if you happen to pay down your debt quicker than the balance transfer program.

Fifth, always check the amount the balance transfer offers. Some banks have different balance transfer rates, depending on the amount of money you wish to transfer. Banks typically cap the amount of money you can balance transfer both on the minimum and the maximum level. Amounts can be as little as RM500 to RM20,000. Sometimes, the maximum depends on your credit card limit.

Sixth, some people have become really skilled at stringing a number of balance transfers behind each other, effectively creating a much longer term low-interest loan. 

However, it requires a lot of administration and discipline, there is always the chance you will not get approved by a bank and you usually cannot return to the same bank again within a certain period.

Seventh, some banks require that you repay the balance transfer in full within a certain period, while others (mostly the more expensive balance transfers) have no fixed repayment scheme.

Eighth, once you have transferred the credit card debt and if you no longer plan to use the old credit card, cancel it, to avoid potential annual fees, confusion or temptation.

Ninth, realise the low-interest rate only applies to the debt you transfer, not for any new purchases you make with your credit card, for which you will most likely end up paying 18% annually. Likewise, don’t use the fact that you now have debt with a very low-interest rate as an excuse to rack up more debt!

Tenth, remember that your balance transfer won’t help you with collecting any cashback, reward points or miles as balance transfer is excluded.  
A balance transfer can be a huge benefit for many who are burdened by credit card debt, but always make sure you understand the exact cost and have a plan in place to pay off the debt before the end of the promotional period.

Mark Reijman is co-founder and managing director of www.CompareHero.my, dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, loans and broadband plans in Malaysia.