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“Balance transfer at 0% for 3 months”
“Balance transfer at 4.99% for 6 months”
“Balance transfer at 6.99% for life”

Finally, there seem to be an escape route on credit card debt. Welcome to the hotly contested credit card balance transfer game. Comparing with the standard 18% p.a interest rate, these promotion rates offer a great opportunity to pay down credit card debt.

There is a huge market for credit card balance transfer. In 2001, the total credit card outstanding balance stood at RM1.17 billion. In 2005, the amount shot to RM2.12 billion, an 80% increase over a 4 years period. At the first 10 months of 2006, it reaches a new height at RM2.25 billion (with the total 7.82 million credit card issued, this is equivalent to an outstanding balance of RM326 per card). The BNM data suggests Malaysia consumers increasingly adopt credit-rolling lifestyle. And this is why banks are offering balance transfer plans – there are a lot of money to be made. To put these numbers in the right perspective, at 18% p.a, the interest of the RM2.25 billion is RM38.2 million per month.

Credit card companies offer these special low rate plans to win business away from their competitors. If they can’t keep your business after the promotion ends, there’s not much point to do it. That’s why one needs to read the fine print in the credit card agreement so you know what charges will apply. However, consumers usually blind-sided by the ever-creative direct solicitation and are unable to differentiate the face value and fine prints. What more, in chasing their sales incentives, most of the salespersons seldom go beyond the obvious.

Balance transfer plans can be a good way to jump-start plan to pay down balances, however it also could be a costly undertaking and backfire on you. This is a 3 parts review on everything you need to know about credit card balance transfer.

Beat the banks on their game

First thing first, do not use credit card balance transfer to delay your debt payment. If you do that, you get yourself into a situation where you are really not making any progress. You are at best prolonging the debt payment by moving your debt from one card to another. All you’re really doing is trying to stay ahead. It’s a tough act to follow through as sooner or later, the special promotion rate will expired.

Understand the payment priority (Most Important)
When you transferred outstanding balance from another credit card at a promotion rate, your monthly payment will first goes to the financial charges if any, then to the low promotion rate balance transfer amount, and at last, if there are any more money left, it goes to your regular card balance than carries 18% p.a. interest rate. In another words, your monthly payment goes to the lowest rate balance first. For example, let say you transferred RM5,000 at 0% interest and has a card balance of RM500 in your credit card, if you pay RM1,000 to your account, 100% of the RM1,000 will goes straight to payoff the RM5,000 from balance transfer and left nothing to pay off the RM500. As a result, you will be slapped 18% p.a. for the RM500. In fact, all monthly payments will goes straight to the balance transfer amount until it’s fully settled.

There are two ways to avoid this trap. Find a bank that separates your balance transfer account from your credit card account. By having a separate account, it allows you to make payment accordingly. However, most of the banks are now offering only combined accounts. At the time this article is written, Standard Charted & RHB Bank is still offers separate account. Call the banks to get the latest update.

If you are attracted to a particular promotion rate but it comes only with combined account, before you transfer any outstanding balance to the card, paid off any outstanding balance and stop charging the card in the future. It probably best to leave that card alone until all balances are paid off.

Watch your card limit
Another common pitfalls in the balance transfer are transfer fees. There are two types of fees – processing fee and handling fee based on amount transferred. Processing fee ranging from RM10 – 80 depending on the bank. Handling fee such as one that uses by Public Bank charges a fee from 2% to 8 on the amount transferred (simply a variant of interest charges). While these fees are clearly spelled out up front in the agreement, not many are aware that the fee is added to the amount of the amount transferred. If you transferred maximum amount to your card, the transfer fee would push you over your credit card limit and you will be slapped with an over limit fee – RM50 or 2% of the over limit, whichever is higher.

Mark your billing date
Balance transfer billing cycle follows your credit card and charges will be slapped if you failed to pay on time. Therefore it is critical to pay attention to when the balance transfer is approved and how it is matched up with the card billing date. If the balance transfer approved just a week before the card billing date, payment has to be made by next week. Sooner of later, the special low interest balance transfer rate will expire, check with the bank the exact date of the expiry so that you know what is going to hit you on your next billing date. The best thing to do is payoff the balance transfer at least a month in advance.

Look beyond low interest rate
Interest rate should not be used as a single deciding factor in choosing balance transfer plan. You should always look at the total cost - interest rate and repayment period. Suppose you choose RHB’s 36 months plan with 7.2% p.a. for a RM5,000 balance transfer, at the end of the repayment period, you would have paid a total interest of RM1,080. But if you chose a higher rate but shorter repayment period, say Am Bank 8,99% p.a. for 24 months. The total interest paid at the end of the period is only RM899, a different of RM181, or 17% less.

Summary:
To play and win the credit card balance transfer game, here are the 5 things you need to know:

• Do not use balance transfer to roll your outstanding debt.
• Do “clean” your card before you make any balance transfer and stop using the card until the balance transfer is fully settled. Reason – you monthly payment goes to settle the balance transfer first before it reaches your current charges.
• Do not transfer the maximum allowable amount to avoid over limit penalty. Reason – processing fee is included and counted in the total amount transferred.
• Pay the balance transfer at the same billing date of your credit card. Remember to check when the special promotion rate will expired. Best to aimed to pay off the balance transfer a month in advanced.
• Special or low interest rate is not the deciding factor; repayment period must take into

End of part 1

Part 2: Searching for the best deal in town