Balance Transfer: How Does It Work And Should You Get One?

Debts from credit cards and other unsecured loans can be tricky to overcome, especially when the interest keeps snowballing. However, if you’re serious about paying off your debts, a balance transfer can be useful.

What exactly are balance transfers, and is there any catch to the advertised 0% interest rate? This guide will explain what balance transfers are, how you can benefit from them, and what to look out for before getting one.

We’ll also shed some light on personal loans and how they compare with balance transfers — all in the name of helping you make a more informed decision.

A balance transfer is a type of unsecured, short-term 0% or low-interest loan commonly offered on a credit card or credit line account. 

As its name suggests, it lets you transfer either the outstanding balance on your credit card(s) to another credit card or a percentage of your available credit card limit to your deposit account to enjoy a low or 0% interest rate loan for a specific period ranging from 3 to 12 months. The balance transfer amount that you borrow will be deposited into a bank account.

A balance transfer essentially lets you buy more time to pay off outstanding debts at 0% or low interest rates compared to the hefty interest rate of 20% – 26.9% p.a. typically charged to a regular credit card or credit line. It doesn’t, however, eliminate your debt. 

Even though a balance transfer will shave the interest charges off your outstanding balance, a one-time processing fee applies to the balance transfer amount. 

Despite offering flexibility when it comes to monthly repayments, it still requires you to make a minimum payment every month and ultimately clear your debt. 

As a balance transfer lets you consolidate all your credit card debts in one account, it makes keeping track of your outstanding balances and repayments an easier, more manageable task — a plus point for sure. 

While a balance transfer is primarily designed to help consumers pay off their credit card debts in a more achievable manner, it can also be a source of emergency funds, providing as little as S$500 to as much as S$120,000 to those who need quick cash and are confident of repaying the full amount within the 0% or low interest rate grace period.

A balance transfer may seem like the perfect solution for your credit card debt or emergency expenses, but only if you use it responsibly. Here are a few things to pay attention to before applying for one.

1. Credit limit

The credit limit of your balance transfers will be tied to your credit card or credit line account, with a maximum amount dependent on your monthly salary.

For example, say you have an existing credit card with a credit limit of S$12,000 and you charged S$2,000 to your card. The maximum amount you can borrow from your balance transfer account will usually be between 90%-95% of your available credit balance - in this case, that’s S$10,000.

2. Interest-free period and processing fees

Balance transfers usually have a 0% interest period lasting 3, 6 or 12 months. Instead of paying interest, there is a processing fee ranging from 1% to 5%, depending on the bank and tenure.

As banks throw in promotions from time to time, definitely do your homework and compare to get the best balance transfer loan available — your bank account will thank you! 

3. Minimum repayment sum per month

Unlike a personal instalment loan, a balance transfer doesn’t require you to pay a fixed amount every month. It’s up to you to decide how much you want to pay each month. However, you’ll need to make the minimum payment each month, which ranges from 1-3% of the total remaining balance.

4. Late payment fees

At some banks, late payment fees will be charged if you are unable to make the minimum payment for either credit cards or credit lines. Late payment fees can go as high as S$75 – S$120, depending on the banks and credit facilities.

5. Interest rates after the interest-free period

If you still have a remaining balance by the time the interest-free period is up, the interest rates shoot up to around 26.9% p.a., similar to the interest rates typically charged on credit cards or credit lines.

Someone who’s struggling to pay off multiple outstanding balances on different credit cards or someone who’s looking for a flexible loan option should consider a balance transfer. 

A balance transfer provides the opportunity to pay 0% interest on your debts. However, make sure you go for this credit facility only if you’re confident of clearing your outstanding balance before the interest-free period ends to take full advantage of the balance transfer facility.

If you can’t, the prevailing interest that will be charged thereafter can go as high as 26.9% p.a. This brings you right back to where you started.

You can find the right balance transfer with our comparison tool. If not, a personal instalment loan or credit line might be the better option.

Both balance transfers and personal loans can help you with two things:

Debt consolidation is a way of dealing with high-interest debt, such as credit card debt. A balance transfer gives you the opportunity to pay 0% interest on your outstanding debt during the tenure period.

A personal loan, which has much lower interest rates compared to credit cards, can also be taken out for the purpose of paying off said credit card debt. It gives you the chance to pay off that debt on a fixed schedule over a longer period at a lower interest rate.

It’s obvious that personal loans can give you quick access to funds, but how can balance transfers do that? Balance transfers are not limited to credit card balances – they can be applied to available credit limits as well. So, if you have an available credit card limit of S$8,000, you can transfer most of that as cash into your deposit account.

Ask yourself these two questions.

The entire purpose of a balance transfer is to take advantage of the 0% interest to pay down most or all of the transferred balance within that time. With prevailing interest rates on credit cards in Singapore standing at about 26.9% p.a., that makes a huge difference. This is about double or triple the rate on a typical personal loan!

Therefore, if you know you can pay off most or all your transferred balance within 3 to 12 months, then a balance transfer is the best choice for you. But if you know you can’t, then it may be wiser to choose a personal loan.

If you need a larger amount of funds or want to consolidate a bigger amount of debt, a personal loan may be the better option as it offers a longer loan tenure, allowing you to space out your monthly repayments over a longer period of time. 

The larger the debt amount, the harder it is to pay it off within the promotional period of a balance transfer. The last thing you want to do is to have a larger sum of borrowed money incurring credit card interest rates.

A balance transfer allows you to transfer either the outstanding balance on your credit card to another credit card or a percentage of your available credit card limit to your deposit account. You get a 0% p.a. interest rate for the balance transferred, which generally lasts for 3 to 12 months. After this period, interest rates revert to normal credit card interest rates. Keep in mind that a one-time processing fee commonly applies.

A personal loan is, as the name implies, a simple loan given out for personal use. It is a type of unsecured loan, so you don’t have to pledge any collateral. A personal loan typically has a tenure of one to five years and allows you to borrow loan amounts from as low as S$1,000 and up to four times of your monthly salary. If you earn an annual income of S$120,000 or more, you may borrow up to eight times your monthly salary, depending on the bank’s offering. This loan amount will be disbursed as a lump sum into your designated bank account. 

It’s also worth keeping in mind that balance transfers generally have a lower Effective Interest Rate (EIR) than personal loans.

It really depends on your situation and preferences when it comes to selecting the right type of loan for yourself.

Choose balance transfer: A balance transfer is particularly handy if you’re consolidating your debts and are confident in paying them off within a specific timeframe, say, between 6 to 12 months. The potential interest savings to be had is truly significant even if you factor in the processing fees. 

For example, you’re expecting to receive a sizeable sum of money in a few months’ time. This sum could be used to pay your balance transfer loan in a jiffy. In that case, there’s really no reason why you shouldn’t take advantage of the low or 0% interest rate a balance transfer facility offers. 

Choose personal loan: A personal loan could be for you if you need a longer tenure of up to seven years. With fixed monthly repayments, a personal loan offers borrowers certainty unlike any other. Like clockwork, you just have to pay your fixed monthly instalments before the due date throughout your loan tenure. 

Choose credit line: A credit line is a useful credit facility to have if you know you need flexible credit withdrawals from time to time. While daily interest charges only apply to the amount drawn, take note that at around 20% p.a., its interest rate is far higher than a personal loan’s interest rate, which typically ranges from 3.4% p.a. to 7% p.a.

What are some other things to consider? Home loans, renovation loans, education loans, car loans are available; these could be more appropriate for your specific needs instead of generic personal loans or balance transfers. So, do your homework! 

Keep in mind that regardless of which loan you choose to take, you should strive to make timely repayments for your loan. This not only ensures that you avoid paying additional late-payment fees, but also helps your credit score in the long run.