Balance Transfers (BT) have long been hailed as the ultimate answer to the problem of credit card debt, but they may not work for everybody. As with any banking product, BTs are also subject to their own terms, conditions and repercussions.
Are you trying to ease your credit card debt woes? You might want to consider something other than a balance transfer if you are anything like one of these four people.
The One with the Low Credit Limit
If your empty card or new credit card has too low a credit limit watch out: You may not be able to benefit from a balance transfer!
The idea of a balance transfer is to transfer all your credit card balances onto one card or just from one card to another. The requirement however, is that the card 'receiving' the balance will need to be able to accommodate the amount in it's available credit limit.
For example, if you have a balance of RM3,500 on credit card A and want to transfer it credit card B: credit card B needs to have an available credit limit of RM3,500 and above. Even having exactly RM3,500 is cutting it too close and you risk getting your application rejected. This is because fees may be incurred on transferred balances (selected banks).
If your credit card limits are low, make sure the balance you are transferring is low enough to fit too.
The One with the Shopaholic Tendencies
Sandra took a new credit card F to transfer a balance from credit card E. After transferring the amount, her credit card E was empty. What did Sandra do? She started swiping again!
Before she knew it; she had filled up credit card E before paying off the new credit card F. She now has two full credit cards and is applying for a third balance transfer!
Credit card balance transfers are great to help you pay down debts faster. But what it does as well is give shopaholics and 'debt-addicts' a new/empty card to refill.
Also, some shopaholics who have available credit on their new cards after transferring their balance, may be tempted to spend with that as well! If you applied for a balance transfer credit card, only the transferred amount is subject to the low BT interest rate offer. Any new spending will incur the full interest rate so it is best to not use that card until you've paid everything off.
Unless you are serious about cutting up your extra cards and really getting down to clearing your debt; a balance transfer won't help you!
The One with Too Many Commitments
Do you already have five credit cards and a personal loan to your name? Take note, if your monthly commitment is too high; your application for the new card you need for the balance transfer won't be approved.
Balance transfers require an empty credit card with the bank offering the preferential rate and tenure of your choice. If you do not have a card from that bank, you will have to apply for one. Similarly, if you have no empty credit cards (all maxed out!) you will have to apply for a new card.
But your application may not be approved if you have too many financial commitments. Typically, the maximum commitment banks will allow is 60% of your gross salary. Although this is the maximum threshold, the percentage will vary for different banks with some opting to be more conservative.
Also, if you earn less than RM3,000 a month; the Bank Negara cap on credit cards will prevent you from getting another card if you've used up your two card/2x-your-salary-credit-limit quota.
The One with No Repayment Discipline
Robert misses his payment deadlines regularly and usually pays as little as he is allowed (the minimum payment). Whilst he initially thought this payment behaviour was "no big deal"; he soon found he had incurred so many late charges on his transferred balance that it was almost the same as paying the full credit card interest rate!
BTs work best when you follow the repayment schedule diligently: paying the amount you should, when you should. This is because many BTs have set monthly amounts that need to be paid or else, the remaining unpaid amount will attract higher interest rates.
Some BTs also require that the whole amount be paid off in the agreed number of months (6 months, 12 months, etc) or you will incur the full, regular credit card interest rate.
If you're not disciplined about repayment; a BT won't help you avoid those pesky fees!
But Does That Mean BTs are Bad?
Of course, not! balance transfers are still an excellent way to deal with credit card debt provided you fall within the application requirements and you use it right. It's the same with any banking product, really. A BT can seriously help you pay down debt faster than when you have to pay huge interest rates along with it but the key is in using it right.