Smart Consumer Banking

“Balance transfer at 0% for 3 months”

“Balance transfer at 4.99% for 6 months”

“Balance transfer at 6.99% for life”

By all measures, these are very attractive offers. These promotion rates are significantly lower than the standard 18% p.a. This seems to be a good opportunity to pay down any credit card debt.

There is a huge market for credit card balance transfer. In 2001, the total credit card outstanding balance stood at RM1.17 billion. In 2005, the amount shot to RM2.12 billion, an 80% increase over a 4-year period. By Oct 2006, it reached a new height at RM2.25 billion. With a total of 7.82 million credit cards issued, this is equivalent to an average outstanding balance of RM326 per card. These data suggest the unhealthy wide spread of credit rolling by Malaysian consumers and this is why banks are offering balance transfer plans – there are a lot of money to make. To put these numbers in the right perspective, at 18% p.a, the interest of the RM2.25 billion is RM38.2 million per month.

From the consumer point of view, balance transfer plan allows one to save on interest and thus paying down the outstanding balance more rapidly.

If only things were that simple!

Credit card companies offer these special low rate plans to win business away from their competitors. However, if they can't keep your business after the promotion ends, there's not much point to do it. That's why one needs to read the fine print in the credit card agreement so you know what charges will be imposed. However, consumers are usually blind-sided by the ever-creative direct solicitation and are unable to differentiate the face value and fine prints. Furthermore, in explaining their offer, most of the salespersons seldom go beyond the obvious.

Balance transfer plans can be a good way to jump-start plan to pay down balances, however it also could be a costly undertaking and may backfire. This is a 3-part review on everything you need to know about credit card balance transfer.

This is a first part of the balance transfer series

First thing first, do not use credit card balance transfer to delay your debt payment. If you do that, you get yourself into a situation where you are really not making any progress. You are at best prolonging the debt payment by moving your debt from one card to another. All you're really doing is trying to stay ahead. It's a tough act to follow through as sooner or later, the special promotion rate will expired.

Understand the payment priority

Suppose you have already carried some outstanding balances or are continue charging the current card, when you transfer outstanding balance from the 2nd credit card at a promotion rate, your monthly payment made to the current card will first goes to the financial charges if any, then to the low promotion rate balance transfer amount, and at last, if there are any more money left, it goes to your regular card balance than carries 18% p.a. interest rate.

For example, if you transferred RM5,000 at 0% interest and has a card balance of RM500 in your credit card, if you pay RM1,000 to your account, 100% of the RM1,000 will go straight to payoff the RM5,000 from balance transfer first and left nothing to payoff the RM500. As a result, you will be slapped 18% p.a. for the RM500. All monthly payments of your current credit card will goes straight to the balance transfer amount until it’s fully settled.

There are two ways to avoid this trap. Find a bank that separates your balance transfer account from your existing credit card account. By having separate accounts, it allows you to make payment accordingly. However, most of the banks are now offering only combined accounts. At the time this article is written, Standard Chartered & RHB Bank is still offering separate accounts. Call the banks to get the latest update.

If you are attracted to a particular promotion rate but it comes only with combined account, before you transfer any outstanding balance to the card, pay off any outstanding balance and stop charging the card until all balances are paid off.

Watch your card limit