by Venus Zoleta, on category "Credit Card"
September 25, 2019
Credit card balance transfer is a promising yet lesser-known way to pay down debt. Rather than let your outstanding balances stay unpaid for months and continue to accumulate debt, you transfer them to a new credit card with a lower interest rate from the same bank or a different one.
That’s essentially how balance transfer credit cards work. But they’re far more complicated than they seem. Depending on various factors, a balance transfer can either get you out of debt or deeper into debt faster.
So before you apply for a bank’s credit card balance transfer program, make sure to understand how it works, as well as its pros and cons. In doing so, you’ll know if this is the right move to manage your credit card debt.
Here are eight important things to take note of before you get a balance transfer credit card in the Philippines.
When you’re approved for a credit card balance transfer, your new card provider will pay your outstanding balance to the original issuing bank. The balance will then be moved to your new card, this time with an interest rate that’s lower than regular rates.
Balance transfer rates in the Philippines go from as low as 0% to 2.15%, depending on the balance transfer amount and the cardholder’s selected repayment period.
Considering that many regular credit cards have interest rates of 3.50%, a balance transfer credit card can help you save money on interest payments. This makes paying off credit card debt faster because your monthly payments will be applied to your principal balance instead of the finance charge.
Consolidating your credit card balances into one card enables you to keep track of only one card instead of dealing with multiple monthly payments and due dates. This helps prevent missed payments and being charged with late payment penalties on your credit card bill.
Banks require cardholders to be in good credit standing with them and other banks to qualify for their credit card balance transfer program. But what does that mean?
While the exact meaning of “good credit standing” varies from one bank to another, it generally refers to making timely payments—at least the minimum amount due—every month.
You’re likely to be declined for a balance transfer credit card if you have a history of missing your credit card payments with your current and past lenders. If this is your situation, focus first on reducing your credit card balances and improving your credit score before you apply for a balance transfer.
That 0% balance transfer rate is too enticing to pass up. However, it won’t last forever.
Usually, it’s just a promotional introductory rate that’s valid for only a short period of two to six months (depending on the bank) from the approval date of the balance transfer credit card. Within this limited time, you won’t pay interest, so your monthly payments will instead go to paying down your credit card debt.
After that period, the interest rate will rise to the regular rate, which could be higher than the rate of your original card.
So as much as you can, pay off your balance transfer amount during the promotional rate period to maximize your savings from the balance transfer card.
It’s tempting to make new purchases with your new credit card, what with the lower interest rate. But that would defeat your purpose for having a balance transfer card.
Racking up new credit card debt on top of your old debt will just worsen your financial situation. On some balance transfer credit cards, the lower interest rate applies only to transferred balances, and new purchases are charged the higher regular interest.
Even if you get a balance transfer credit card with a low interest rate on new purchases, adding new debt will make it hard for you to pay off your credit card balance.
Each time the urge to splurge is hard to resist, keep your eye on your goal: Get out of debt ASAP. Thinking this way makes it easier to avoid making new purchases with your balance transfer card.
The monthly installment terms of balance transfer credit cards in the Philippines range from three to 60 months, depending on the issuing bank.
When you apply for credit card balance transfer, you’ll be asked your preferred repayment term. Consider the balance transfer amount you need to pay off and interest rate. This way, you can determine how long you can repay your balances before the regular interest rate is applied.
Typically, the longer the payment term, the lower your interest rate will be and the monthly installment amount. While that sounds like a good deal (as it makes monthly payments easier on the budget), it might cost you more in the long term.
Switching to a balance transfer credit card is not completely free. Banks charge certain fees related to the balance transfer. For example, Citibank charges a PHP 250 disbursement fee upon approval of the Citi balance transfer card application.
Other banks like Security Bank and HSBC charge a pre-termination fee (ranging from PHP 300 to PHP 500) for early repayment or cancellation of the balance transfer before the end of the repayment period.
It’s important to know such costs to avoid paying unnecessary charges, if possible.
Wondering what would happen if you have a remaining unpaid balance after your repayment period ends?
The unpaid balance transfer amount would be charged the higher regular interest rate. You don’t want to get to that point, as it means you’ll be buried deeper in debt.
To avoid this unfortunate scenario, do your best to pay off your balance by the end of your credit card’s repayment period. Make sure to always pay your credit card bill in full and on time.
Availing a credit card balance transfer can be a good or bad decision, depending on your chosen terms and spending habits. Consider the points listed above to know if a balance transfer card will help you manage your credit card debt. Read the fine print carefully, do your own research, and compare credit cards to gather enough information and make a wise choice.
However, having an unsettled credit card debt for a long time is a different story altogether. While a balance transfer won’t solve that, you may consider applying for a credit card amnesty through your bank or the Interbank Debt Relief Program of the Credit Card Association of the Philippines.