Credit Card Balance Transfer – How It Works And Should You Use It?

The amount that you owe on your various credit cards can accumulate very rapidly. Before you know it, you could be thousands of dollars in debt. According to government statistics, Singaporeans had a cumulative “rollover balance” of S$5.3 billion on their credit cards at the end of April 2017.

Considering that banks charge interest rates of over 20% per year on credit card debt, the total amount of interest that individuals pay exceeds S$1 billion every year. This sum does not account for the fact that many banks charge interest at even higher rates.

If you are in a debt trap because of your credit cards, it is important to find a way out.

The balance transfer facility offered by some banks offers a solution.

What exactly is a balance transfer?

Say, you have three credit cards that you use regularly and you have accumulated a balance of S$4,000 on the first, S$3,000 on the second, and another S$3,000 on the third. That’s a total of S$10,000 on which you would be paying interest at the rate of 20% or more per month.

You want to pay off your entire debt and make a clean start. But you don’t have the S$10,000 that you need to liquidate your outstanding amount.

You could opt for Citibank’s balance transfer facility. The entire S$10,000 can be transferred to a new Citibank credit card account. Of course, your Citi credit card should have a limit that is high enough to accommodate this transfer.

In fact, Citibank stipulates that the amount that has been transferred should not exceed 90% of your card’s limit.

The greatest attraction about the balance transfer scheme is that you get an interest-free period of between three months and 12 months to pay off the amount that you have transferred to your credit card.

Banks offer different interest-free tenures, but in Citi’s case, new card members get two options – they can repay within three months or six months. The balance transfer facility is also available for existing Citi card members. If you already have a Citi card, you can repay the transferred amount in six months or 12 months.

Why doesn’t the bank charge interest?

Although the balance transfer is labelled as non-interest bearing, the bank does charge a “processing fee.” This processing fee is, in effect, an interest charge. However, the effective interest that you bear is quite low.

The following table will illustrate how much you have to pay under the terms of Citibank’s balance transfer program.

Two points are apparent from the above table.

• Although the stated interest rate is nil or 0%, the payment of a processing fee results in the cardholder bearing a certain effective rate of interest. But at 3.65% to 6.73% for new customers and 5.81% to 7.87% for existing clients, this is quite low.
  Why would the bank be willing to lend at such a low rate? It wants to attract new customers and increase its business volumes. By providing an incentive to individuals to transfer their credit card outstanding balances to Citi, the bank is growing its loan book.

• Once the balance transfer process is complete, you have a limited period to pay off the loan. This ranges from 3 months to 12 months. According to Citibank’s rules, you have to pay the higher of 1% of the transfer amount or S$50 every month.

What if you cannot repay the entire loan within the approved tenure? If this happens, your outstanding balance will attract interest at the prevailing cash interest rate of 26.9% per year.

Do other banks also offer balance transfer facilities?

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Several banks in Singapore offer you the opportunity to transfer your outstanding credit card balances to a single account.

OCBC is currently running a promotion that offers S$100 in CapitaVouchers for every S$10,000 that is approved as a loan amount for a 12-month tenure. The incentive is capped at S$300 in CapitaVouchers per customer.

CapitaVouchers are redeemable at over 2,000 stores across 17 CapitaLand Malls in Singapore.

DBS Bank has a similar program where it offers credit card members the facility of transferring their balances to a DBS credit card.

The bank is currently running a promotion that has a two-tiered incentive offer. If you make an online application for a balance transfer amount of S$8,000 to S$14,999, you will be eligible for a cash back amount of S$60. A balance transfer application for S$25,000 and above will get you a cash back of S$200.

HSBC also has a balance transfer program. The bank charges a concessional interest rate of 2.5% per year for six months and 4.88% for 12 months. In addition to the interest, HSBC also levies a processing fee of S$88. This can be waived if the amount transferred exceeds S$10,000

You need to pay off the entire amount within the sanctioned tenure. If you do not, you are liable to pay interest at the cash advance rate on the remaining balance. The current rate is a stiff 28% per year.

Plan your balance transfer carefully

If you have a large credit card outstanding that you want to pay off, the balance transfer facility that your bank offers can be your best option. But you have to make sure that you liquidate the entire amount within your chosen tenure.

Delaying payments or missing them altogether will result in a demand being raised on you for late payment charges. Additionally, it will have a negative effect on your credit standing.

Above all, if you cannot meet your commitment to pay off the entire amount that you have transferred, you will be right back where you started. The outstanding amount on your credit card will start accumulating interest at the cash advance rate. This will put a strain on your finances and make it difficult for you to bring your dues within controllable limits.

Disclaimer: All credit card information is accurate at time of writing and should only be used as a reference. For the latest promotions, benefits, and terms and conditions, please refer to the respective credit card companies’ websites.

(By Ravinder Kapur)

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