Friday, 9 December 2016

Balance Transfer: Should You Take It?

For the uninformed, balance transfer (sometimes known as fund transfer) is similar to a short term bridging loan usually for tenure of 3 months, 6 months or up to a year. The bank providing the balance transfer will charge a one time processing fee and "promotional" interest rates on the money they disbursed to your credit card / bank account. 

Original Purpose of Balance Transfer

Source: www.ocbc.com
The original purpose of a balance transfer is to use the "promotional" period where the interest rate is low (at the time of this post, effective interest rate [EIR] is around 5-8% pa) to settle outstanding debts with higher interest rates (e.g. 24% pa credit card). As per above illustration, you will be able to save a significant amount of interests payable. 

After the balance transfer has been completed, your debt has been effectively "switched" from one bank to another. Do take note that your credit limit with the new bank will be reduced up by the outstanding balance transfer amount.  

It is your duty to settle your debt obligation within the "promotional" period as the banks will charge credit card interest rates (24-26% pa) on outstanding balance transfer amount if they are not settled within your agreed tenure. 

New Purpose of Balance Transfer

Balance transfer services are now being advertised as extra cash for well deserved holidays or spending. In fact, most banks are offering a 0% interest rate with a low one-time processing fee ranging from 0 to 6%, especially during this festive period. 

I was initially offered a promotional 2% processing fee (approx 4%+ EIR) + 0% interest on any amount within 95% of my credit limit by UOB for a 6 months tenure. However, I have opted for some extra cash from Maybank Fund Transfer, still pending approval at 2.13% EIR. With Christmas and New Year just around the corner, I believe many of you (and myself included) will have much higher expenses whether it is for gifts, new clothes or ang baos. The extra cash will help to ease my cash flow while i wait for my 花红 (bonus, if there is any....).

A balance transfer is definitely a BETTER short term solution for extra cash in the short term than swiping your credit card with outstanding balance. However, the best solution is still not to take any debt and pay everything in cash (if you have sufficient amount).

The following banks also provide balance transfer loans: 


Summary 

While taking short term loan is usually a no-no for me, additional liquidity at very low interest is not actually a bad deal. If you are going to make use of any balance transfer this festive season, ensure the loan amount is within a comfortable range, e.g. 1 to 2 times of your take-home salary. Furthermore, try your best to repay your loan amount monthly (e.g. $1,000 per month for 6 months for a $6000 balance transfer)  and don't leave it till the last one to two month to realize you are unable to summon the cash for repayment. Santa Claus also can't help you if you are going to pay 25% pa on outstanding balances. 

Best,
AT

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