Why a Credit Card Balance Transfer might be the Solution to your CNY Spending
No doubt about it – Chinese New Year (CNY) in Singapore may be the most expensive event of the year. The cost of reunion dinners, CNY hampers, festive decorations at home and the steep angpows for everyone certainly adds up.
Unless you planned ahead and set aside funds to cover your CNY expenses, chances are good that you’ve probably tapped into your credit cards a bit more than you should have. And if there’s one credit card mistake you should avoid – it’s getting into too much credit card debt.
However, there’s good news. You might be able to dig yourself out of that financial hole you dug yourself in – with a credit card balance transfer.
What Is a Credit Card Balance Transfer and How Can I Use It?
In short, a credit card balance transfer is the transfer of debt from one credit card to either a new credit card or one of your existing credit cards that offers a lower introductory interest rates.
Credit card balance transfers typically have the following features:
- Low or No Interest Period: Transferred balances usually benefit from a low (4% to 7%+) or 0% interest-free period of at least 6 months.
- Annual Fee Waiver: Credit card issuers can offer an annual fee waiver for new card applicants.
- Balance Transfer Fee: Applicants will need to pay an upfront balance transfer fee of 2% to 4%+ of the balance being transferred (e.g. a fee of 3% for a transferred balance of $10,000 = $300).
Now let’s look at a real-world example:
Let’s say that you have a S$6,000 balance on a credit card with a S$7,000 limit and an annual percentage rate (APR) of 27.99%. That means you’re using about 86% of your credit card’s available credit (S$6,000 balance / S$7,000 limit = 86%)
You then decide to transfer that S$5,000 balance to a new credit card account with a $10,000 limit and a 6-month 0% interest-free promo.
By making the credit card balance transfer in this case, you’ve done two things:
- Lower Credit Utilisation Ratio: Your overall credit utilisation ratio dropped from 86% to 35% (S$6,000 balance / S$17,000 total available credit = 35%)
- Lower Interest Rate: Your interest rate dropped from 27.99% APR to 0% for a period of 6 months.
Should You Make a Credit Card Balance Transfer?
The answer to that question really depends on two things:
1. The amount of the balance you want to transfer
2. Whether or not you have the ability to pay off your balance before the promotional interest period ends.
Let’s say you have a credit card with a S$9,000 balance and a S$10,000 credit limit. You transfer the balance to another credit card with a S$12,000 limit and a 6-month 0% interest promotional rate.
After 6 months, you’ve only managed to pay off S$3,000 because you can only pay S$500 a month. After the promo ends, you’ll have to pay the credit card’s normal interest rate of 26.99% APR on that remaining S$6,000 balance!
Remember – the interest rate will revert back to the credit card’s standard interest rate after the period ends.
So if you can’t pay off the transferred balance before the promotional period ends (e.g. 6 to 12 months), you’re probably better off taking a 3-year personal loan with an interest rate of 7% to 10%.
The table below may give you a clue on the interest difference between the two.
Which Credit Cards Should You Transfer Your Balance(s) To?
In Singapore, the interest rate promotions and fees vary by credit card issuer.
However, you’ll still want to be selective about which credit card you select for the balance transfer by choosing a credit card with benefits and perks that fit your lifestyle.
Here are several credit cards you can consider if you want to transfer your credit card balance(s):
*Click here for more credit card information
Using a credit card to help you handle your credit card debt sounds counterintuitive.
However, if you’re dealing with a manageable amount of credit card debt and have the financial ability (and willpower) to pay off that debt within 6 to 12 months – it’s a great way to get back on financial track without paying that 27%+ credit card interest rate.
For more financial tips and tricks to optimise your financial lifestyle, visit imoney.sg and learn all the best moves to make with your money.