#SaveMoneyWithHann: Stop Paying Credit Card Interest And Save RM1,000s
Hann Liew
4th June 2020 - 11 min read
In my last post I mentioned that by changing what you use to spend – i.e. from cash to credit cards (and/or eWallets) – you can immediately save (or make?) money in the RM100s for the average family, rather than just going straight down the “don’t spend” route.
Credit cards are great, but if you’ve got existing credit card debt which you can’t pay off within your monthly bill deadline, this means you’ve consistently got a balance on your card and are paying credit card interest.
To save money here, the best way to think about it is to reduce the number in front of the % that you’re paying, likely somewhere between 9% – 18% p.a., or 0.75% – 1.5% each month on that balance on your credit card.
If you are struggling to repay your outstanding credit card balance, shifting that amount to a credit card with a balance transfer program can save you RM100s if not RM1,000s.
TLDR – If you can’t pay back a large purchase or your credit card balance in full by the repayment date, better to do a Balance Transfer, buy some time at 0% p.a. and save RM100s of interest charges along the way.
How Do Balance Transfer Programs Work?
Think of it as one credit card paying off another credit card’s outstanding balance, which will be charged in installments at a significantly lower interest rate and sometimes for a small one-time upfront fee. This buys you time to pay off that balance, with less (or even no) interest accruing and making it even more difficult to do so.
If you don’t have another credit card (i.e. only the one which you have a large balance on), you will have to apply for a credit card from another bank, and you will be given either a separate balance transfer form, or be required to fill in the “Balance Transfer” section of a large credit card application, which will be processed alongside or right after your credit card application.
You will usually be able to transfer up to 80% of your new credit card limit, so if you have a new credit card with a RM10,000 limit, you will be allowed a maximum transfer of RM8,000. Your balance will then be “transferred” from your “old” card to your newly-approved credit card within a few working days. You then pay off your balance over the agreed payment period, which starts from three months and can stretch all the way to 36 months.
For an in-depth explainer about how Balance Transfer programs work, my team has gone through a ton of work for you in their Balance Transfer 101 research piece.
5 Balance Transfer Golden Rules
Along with late payment fees, if you miss/underpay any installment, you will be charged interest on the remaining balance for the period of being overdue (and not just the single installment).
Just because you have a fresh line of credit at low rates (0% with a small fee), does not mean you should now assume you have “spare money”. Remember, if you’re trying to save money (and you will, with balance transfers), spending more that you would have because of it defeats the purpose.
This used to be a thing for seasoned credit card users as you can find deposit accounts with interest rates that were relatively higher than fees on Balance Transfers, but at today’s rates, the upfront fees for balance transfers are now likely to be higher than any savings interest rates – so you don’t make money from longer tenures like you could before.
In most countries, balance transfers allow you to transfer balances to another card and just pay the monthly 5%-of-balance minimum payment. This is slightly different in Malaysia where a balance transfer is usually just like a (very low effective interest) Term Loan on your new credit card. If you just pay that 5% and not the full installment amount, you’ll be charged interest as per Rule #1.
Every application for a credit card (whether approved or rejected) will show up on your CCRIS record as a “credit application”, and that will affect your chances of approval of future credit applications. Our Credit Card Eligibility Checker allows to you see which credit cards with balance transfer programs you are likely to be approved for even without having to make a formal application to any bank.
How much can I save?
If you had a balance on your card which you can’t pay off by the end of the statement due date, then you can potentially save RM1,000s with a balance transfer plan.
To give everyone a better sense of what I mean, here is a quick illustration of an example situation to consider for someone who needs to make purchases with their credit card totaling RM12,000 but can only pay it off over 6 months.
In the table below, I’ve given some realistic BT scenarios that can be found in the market today: 0% for 6 months with 1.5% upfront fee, 0% for 12 months with RM0 upfront, and 0% for 24 months with a 5% upfront fee.
| Used Credit Card A to buy home furniture totaling RM12,000 | No Balance Transfer | Balance Transfer for 6 months | Balance Transfer for 12 months | Balance Transfer for 24 months |
|---|---|---|---|---|
| Balance on credit card | 12,000 | 12,000 | 12,000 | 12,000 |
| Monthly repayment | 2,088 | 2,000 | 1,000 | 500 |
| Interest | 15% p.a. | 0% p.a. | 0% p.a. | 0% p.a. |
| Upfront fee | 0% | 1.5% | 0% | 5% |
| Total Interest Paid on Credit Card | RM528 | RM180 | RM0
| RM600
|
| Potential Savings With A Balance Transfer Plan | N/A | RM348 | RM528 | (-RM72) |
In the example above, you bought RM12,000 worth of stuff but only can pay ~RM2,000 each month, and therefore it is best to apply for a balance transfer program that allows you to minimise the interest (or fee) over the 12 months. The savings can run up to the RM100s on a like-for-like basis.
Likewise, the example above shows that you pay an extra RM72 in fees/interest for a 24-month BT plan vs 6 months with no BT. While you do end up paying a slight amount more, you stretch the repayment terms by 4x – if your cashflow is tight, it actually makes sense to do this and reduce the risk of additional interest charges and/or late payment fees if you had no BT plan.
Balance Transfer For The Pros/Seasoned Credit Cardholders
Now, we’ve shown how a balance transfer plan is normally used. But as with any financial tool, there will be a group of users who will maximise its potential benefit.
For this group of “power users”, balance transfers are a tool to earn interest. Many search for the “holy grail” of 0%, 0 upfront fee balance transfer plans, which banks usually offer as seasonal campaigns. Don’t be surprised to see many of these users stringing multiple BTs, where one plan pays another! (as I said, “power users”)
How exactly do these pros earn money from BTs? Most of the time, this group of users have the ability to pay their credit card bills in full each month, but if they can repay it in installments at 0% over a year, that money can be put into a fixed deposit account or a high interest savings account which then accrues interest.
Since a BT isn’t like a credit card easy payment plan which converts only one transaction, a BT is a lot more flexible for power users by allowing them to convert any amount charged to one card and be paid off in installments on another card – that’s why the “holy grail” 0%, fee-free plans are much sought after.
Plus, even if a bank offers 0% BT plans but with small upfront charges, the interest earned may potentially be higher – in this case, some homework should be done before applying for one.
That said, things have changed quite a bit in recent times. In the past (i.e. pre-2020), when promotional interest rates for 1-month fixed deposits were in the 3% p.a. range, one could conceivably apply for a balance transfer program and make a little money on the side from sticking the unpaid balance into a 1-month FD and pocketing the interest (i.e. the balance that you transferred, but keep in mind that balance shrinks over time to pay off the balance on the new card).
Just how much can one earn from this interest? Let’s break it down with the same example earlier.
| Used Credit Card A to buy home furniture totaling RM12,000 | No Balance Transfer | Balance Transfer for 6 months | Balance Transfer for 12 months | Balance Transfer for 24 months |
|---|---|---|---|---|
| Balance on credit card | 12,000 | 12,000 | 12,000 | 12,000 |
| Monthly repayment | 2,088 | 2,000 | 1,000 | 500 |
| Interest | 15% p.a. | 0% p.a. | 0% p.a. | 0% p.a. |
| Upfront fee | 0% | 1.5% | 0% | 5% |
| Total Interest/Fee Paid on Credit Card | RM528 | RM180 |
RM0 |
RM600 |
|
Interest earned from a 2% p.a. 1-month FD on amounts you don’t have to pay back first (i.e. put the difference between the repayment amounts into an interest bearing account) |
N/A |
RM50 (RM10,000 in Month 1, RM8,000 in Month 2, …, RM2,000 in Month 5) |
RM110 (RM11,000 in Month 1, RM10,000 in Month 2, …, RM1,000 in Month 11) |
RM210.83 (RM11,500 in Month 1, RM11,000 in Month 2, …, RM500 in Month 23) |
| Total Net Interest/Fee Paid | RM528 | RM130 | -RM110 | RM389.17 |
| Theoretical “Effective Saving” (BT vs no BT) | N/A | RM398 | RM638 | RM138.83 |
In the new (lower) OPR environment , as savings (and lending) rates have dropped, the rate at which you can “earn” is dramatically reduced. Even worse, those pesky Balance Transfer “upfront fees” may be quite a bit higher than savings rates, making any “profit” either very very small, or not attainable without going for “fee-free” options.
Bonus Tip: Search For 0% & 0 Fees Balance Transfer Plans – They Exist!
If you’ve made it this far, you should now see that BTs are a useful tool to manage large outstanding balances and even to earn interest. If you’re on the look out for one, try searching for the zero interest, zero upfront plans (i.e. 0% for 6 or 12 months with 0%/RM0 upfront fees). There are usually one or two banks offering this on a promotional basis at any given time, watch out for them in our monthly BT promo article!
See how this changes the illustration above:
| Used Credit Card A to buy home furniture totalling RM12,000 | No Balance Transfer | Balance Transfer for 6 months | BT for 6 months, 0% upfront fee |
|---|---|---|---|
| Balance on Credit Card | 12,000 | 12,000 | 12,000 |
| Monthly repayment | 2,088 | 2,000 | 2,000 |
| Interest | 15% p.a. | 0% p.a. | 0% p.a. |
| Upfront “Fee”/”Interest” on Balance Transferred | 0% | 1.5% | 0% |
| Total Interest Paid on Credit Card | RM530 | RM180 | RM0 |
| Interest savings from Savings Account / FD (ie put the difference between the repayment amounts into an interest bearing account say at 3%p.a.) | – | – | – |
| Total Net Interest/Fee Paid | RM530 | RM180 | RM0 |
| “Saving” | – | RM350 | RM530 |
So it sort of looks like some credit cards will basically give you money “for free”? Yes! But how does the bank or credit card issuer make money then? The simple answer is that they will likely try and make money off you by fees (in case you are late paying your monthly bill, etc.) and cross-selling (selling you some other bank products), so remain disciplined in your monthly repayments, and always compare (rather than just be upsold something) and you will be able to make (rather than lose) money!
Final Words
https://ringgitplus.com/en/balance-transfer/While I’ve highlighted the various fees and things to watch out for with balance transfers, the reality is that I highly recommend using them whenever needed, at least ahead of any other types of financing instruments (ahead of even home loan top-up refinancing and definitely ahead of cash advances or personal loans). Why? The simple reason is that for medium term (6-24 months) lending it’s usually the cheapest form of debt (~3% p.a.), vs. those other options.
So if you have a need to buy or pay off something large and don’t quite have the cash at hand, consider the following hierarchy:
- Cash at hand
- Spend (on a Cashback Credit Card) with a 0% EPP
- Spend (on a Cashback Credit Card), and then Balance Transfer it (0% – ~3% p.a.)
- Home Loan Top-Up or Refinancing Loan (3.5-4.0% p.a.)
- Credit Card Installments on your Existing Card (3.5% – 7.5% p.a. depending on your bank)
- Personal Loans (4.5% – 12% p.a. depending on the bank)
- Should Probably Stop here (and if you can’t access the above options, consider whether you really need the large purchase or not).
As you can see, Balance Transfers are closer to the top of the list than the bottom, so it is worth considering before the other higher interest options first.
About THE AUTHOR
Hann Liew
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