Work out whether a balance transfer saves you money once you count the fee and the length of the promotional period.
If you carry a balance on a credit card, you pay interest at the card's rate every month on whatever you haven't cleared. Banks often offer a way out of that rate. You move the debt to them, pay little or no interest for a while, and clear it during that time. The offer can save you real money. It can also leave you owing more than before. Which one happens depends on a few numbers and on what you do with your cards afterwards.
A balance transfer moves debt you already owe to a new facility at a low or zero interest rate for a fixed promotional period. These periods are often a few months to a year. In exchange you usually pay a one-off fee. Some banks charge it as a percentage of the amount transferred, while others charge a flat processing fee instead. Check the bank's own terms for the fee that currently applies.
Some transfers pay off your card balance directly. Others pay cash into your bank account, and you then use it to clear the card. The terms say which. Either way the effect is the same: the old debt is cleared and you owe the new lender instead.
The promotional rate applies only during the promotional period. When it ends, any remaining balance moves to the facility's normal rate, which is usually high and often close to card rates. For this reason the end date of the promotion matters more than anything else in the offer.
Aisha, who also has the dental bill from her first problem, has built up S$5,000 (an example figure) on her credit card over the past few months. Each month she pays a little more than the minimum. A letter arrives from another bank offering 0% for six months if she moves the balance across. The fee is 3% of the amount transferred, charged once.
The letter is right that a transfer can save her money. It saves money only if she does three things the letter does not mention.
Start with the fee: 3% of S$5,000 is S$150. Next, estimate what staying on her current card would cost. Her card charges 26% a year, so the first month's interest on S$5,000 is about S$108. If she cleared the debt on that card in six or seven months, paying about S$833 a month, she would pay roughly S$416 in interest in total. The transfer costs her the S$150 fee, provided she clears the balance within six months. S$416 minus S$150 gives a saving of about S$266.
The fee is not free money, and it helps to express it as a rate as well. Paying S$150 to borrow a reducing balance of S$5,000 over six months gives an EIR of about 10.5% a year, using the RATE method from Lesson 3.1, "Personal instalment loans: fixed payments on a flat rate". That is far cheaper than card interest and well above the advertised 0%.
To check any offer, work out the fee, estimate the interest you would pay clearing the debt on your current card, and compare the two. If you like, convert the fee to an EIR as well. The transfer saves money only if the fee is smaller than that interest and you clear the balance within the promotion.
You can find the payment you need in one line: the balance divided by the number of months in the promotion. For Aisha, with the fee charged separately, that is S$5,000 / 6, about S$833.33 a month. If the fee is added to the balance instead of being charged separately, include it before dividing: S$5,150 / 6, about S$858.33 a month.
Either figure is far more than the minimum payment the new lender will ask for. Pay the amount from your division each month, and treat the lender's minimum as irrelevant to your plan.
Suppose Aisha pays S$500 a month because that is what she is used to. After six months she has paid S$3,000, so S$2,000 is still owed when the promotion ends. That S$2,000 moves to the normal rate. At an example 26% a year, it costs about S$43 a month in interest from then on. She is back where she started, with a smaller balance and no cheap rate.
Some people move the remainder to yet another 0% offer and pay another fee. Each fee is small, but they add up. Each new application also leaves an enquiry on your credit report, as Lesson 1.3, "What moves your risk grade up or down", warned.
The second way a transfer fails starts once the debt has moved. The old card is now clear, its limit is available again, and the habits that built the original debt are still there. If Aisha puts new spending on the cleared card and does not pay it in full, she ends up with the transferred balance plus a fresh card balance at the full rate.
Some balance transfers also come with conditions on new spending. If the transfer sits on a card, new purchases on that card may be charged interest straight away, as Lesson 2.1 described for a carried balance. Read the terms on how repayments are applied and whether new purchases get an interest-free period.
A balance transfer works only when all three of these hold:
You can make the payment that clears the balance within the promotion. You stop adding new card debt. The fee is smaller than the interest you would otherwise pay.
If any one of them fails, the cheap bridge can end up costing more than staying put.
Aisha's next step is to find a real offer and put its actual terms into the same sum. She needs four of them: the promotional rate, the length of the promotion, the fee, and the rate afterwards. Once she has those, the required monthly payment is one division away.
Take a real balance transfer offer and a S$5,000 card balance. Work out what you would need to pay each month to clear it before the promotional period ends.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).