An Introduction To Credit Card Tiered Interest Rates
If you ever find yourself neck deep in credit card debt, repaying what you owe will become a challenge. Too busy at work, need cash for other bills, you'll strike the lottery soon - the list of excuses just goes on and on!
Remember, the interest fees for any outstanding balance on your credit card are compounded daily according to a tiered interest rate system:
- 15% p.a. – if you pay your credit card bills on time for 12 consecutive months
- 17% p.a. – if you pay your credit card bills on time for 10 out of 12 months
- 18% p.a. – if you don't pay your credit card bills on time at least 10 out of 12 months
If your credit card is charged an interest of 17% p.a., that means your outstanding balance will increase by 0.0466% every day until all your debt is cleared. Think that's an insignificantly negligible number? Think again.
Two words: Compounded Interest!
Let’s say you have accumulated an outstanding balance of exactly RM1,000. To clear your balance you’ve decided to stop using your credit card and make minimum payments of RM50 every month.
It’ll take you a total of 1 year and 11 months to repay everything, including a total of RM184 just on interest fees. RM184? Just on interest fees. You've just wasted close to 2 years paying an extra RM184 for something that's totally avoidable!
OK, so you’re tired of paying hundreds of Ringgit each month, only to find that your credit debt is steadily increasing. If this is you, you’ll want to read on!
How To Save Money With A Balance Transfer
As the name implies, a balance transfer allows you to transfer the outstanding balance from one credit card to another. You’ll have to decide on a tenure with the bank to repay your credit debt in monthly instalments.
Banks will generally allow you to perform a single balance transfer with up to 3 different credit cards. While you don’t have to transfer the balance in full, most banks will require that you transfer a minimum amount of RM500 to RM3,000.
And no, you won’t be able to perform a balance transfer using credit cards from the same bank! There are two types of balance transfer programmes:
Fixed balance transfer – you’ll be given a repayment schedule by the bank to repay what you owe in fixed instalments each month. A lot less flexibility here, but you’ll get better interest rates!
Flexible balance transfer – you get to pick and choose if you want to make minimum payments or pay extra each month. As long as you settle your transferred credit debt in full by the end of agreed tenure, you’re good to go!
Why would anyone move their credit debt from one credit card to another? There’s a good reason for this.
As long as your repay what you owe within the agreed payment period, a balance transfer offers you much lower interest rates than the tiered rates on your credit card - from as low as 0% and no higher than 10% a year!
You’ll be given an extended period between 3 months to 4 years to repay the debt that you owe. This allows you to buy some time to pay off your credit debt without having to worry about daily compounded interest being added to your outstanding balance.
Things To Ask Yourself Before Signing Up
Thankfully there aren’t any GST charges that you’ll have to worry about. But if you’re thinking of getting a balance transfer, here are some questions that you might want to consider:
1. How much debt do you want to transfer?
This question is important for a few reasons. First, the bank will have a minimum transfer requirement.
Second, you’ll need to have enough credit limit on your new low interest credit card to transfer all your credit debt.
Lastly, in order to enjoy the special low balance transfer interest rate, you’ll need to repay the entire amount in the agreed repayment period.
If fail to do your credit rating will take a hit, and tiered interest rates will be charged to the remaining balance.
2. Do you already have a credit card with the bank?
If you’re looking at a specific balance transfer programme, you’ll need to own a credit card with that bank.
Existing customers can go ahead and apply anytime. If you’re new to the bank you’ll need to apply for a new credit card.
3. What’s your credit limit?
The amount of credit debt that you can transfer will depend on your credit limit. Banks will never let you max out your credit limit with a balance transfer.
If you’re planning to get a credit card solely to get a balance transfer, make sure that the credit limit is higher than the amount you want to transfer.
4. What are the fees and charges?
Not all balance transfer plans allow you to make minimum monthly payments. Take note of the consequences if you can’t make your monthly payments in full, as well as the late payment penalties.
Some banks may also charge an upfront handling fee for your balance transfer, which is usually a percentage of the total transferred amount.
If you plan to settle your debts ahead of schedule, check if your bank charges an early settlement fee on your balance transfer. This fee is usually between RM70-RM100.
Avoid These Balance Transfer Mistakes
So you’ve secured a balance transfer and everything seems to be looking up. But here’s a mistake that people often make – they either end up not paying their monthly instalments or use their new credit card to rack up even more debt!
In these situations your balance transfer will end up costing you more money than it saves you. Avoid digging yourself into a deeper financial hole by keeping these best practices in mind:
Don’t swipe using the credit card which your balance has been transferred to. Remember that the low interest rate only applies to the outstanding balance from your balance transfer, not for new purchases!
All additional debt will be charged the regular tiered interest rates. Accumulating more credit on your new credit card will result in dual-interest rates on your outstanding balance – now that's a massive headache!
Always pay your monthly repayments in full. The bank will give you a recommended payment schedule to settle your credit debt on time.
Don’t skip payments, pay less than the required amount, or make too many late payments! You’ll risk losing your balance transfer rates and end up paying regular tiered interest on your remaining credit debt.
Cancel your other credit cards. No, really. The point of getting a balance transfer is to help you manage your finances and settle your credit debt.
Accumulating more credit debt will only hurt your credit rating and lower your chances of getting a good rate on housing or car loans.
If you default even once, your chances of getting another balance transfer approved in the future are slim to none.
Your Next Step
Yes, a balance transfer could be your answer to more savings, but only if you’re really serious about getting your finances and spending habits back on the right track. Do a quick budget of your finances and come out with a reasonable repayment sum which you can afford.
Once you’ve picked a balance transfer plan which works for you, get in touch with the representatives from the bank. They’ll draw up a repayment schedule for you – but that’s just the start.
Set aside the cash that you’ll need for your balance transfer payments at the start of each month, immediately after you’ve gotten your salary. Make your payments promptly and in full!
Which bank offers the best balance transfer rate? Comparing all the different balance transfer plans out there can be tricky if not time consuming. So we’ve done the research for you.
Check out all the Best Balance Transfer Deals on RinggitPlus for easy side-by-side comparison! That’s easy and hassle-free savings just a few clicks away!