Understanding Balance Transfers: How Much Can You Really Save In Interest?

You may have read about how a balance transfers can act as a zero-interest shortcut to paying off debt. But like all debt management tools, a balance transfer has its own unique set of pros and cons. Here’s everything you need to know on using a balance transfer to save money on interest charges. 

What is a balance transfer and how does it work?

A balance transfer (BT) is a commonly offered financial tool that provides short-term liquidity at a super low cost of borrowing. 

A typical BT offer reads like this: 

• Borrow up to $10,000 at 0% interest over 6 months. Processing fee of only $150 (EIR 3.5%).

Let’s break down what that means to help us better understand a BT. 

Borrow up to $10,000: This is straightforward enough, it tells us how much you can borrow, in this case, maximum of $10,000.

0% interest over 6 months: This indicates an interest-free period attached to the offer, which is a signature feature of BTs. In this case, the interest-free period is for 6 months, meaning you won’t be subject to interest charges on your loan if you pay it back within 6 months.

Processing fee of only $150: The processing fee (sometimes known as application fee) is what the bank charges you for executing this BT. This fee is usually charged upfront. 

(EIR 3.5%): This represents the true cost of borrowing. Different banks calculate the effective interest rate (EIR) differently, but they are always required to communicate this clearly and prominently. 

What are the advantages of a balance transfer?

There are several advantages that a BT can provide. Two of the most helpful ones are:

1. Savings on interest payments
2. Flexible liquidity

These two advantages make BTs an ideal tool for those who need help to manage their unsecured debt, such as those stemming from credit card use that got a little out of hand. 

Think of a BT as a short-term loan that you can use to pay off debt or meet other urgent financial needs. The difference is, unlike other loans, a BT has an interest-free grace period. It can last anywhere from 3 to 24 months, depending on the offer. 

If you manage to pay back your BT within the interest-free period, you do not have to pay any interest charges on the loan. However, if you fail to do so, you’ll be charged interest (usually the bank’s prevailing interest rate) on the remainder of your BT, until you finish paying off the loan. 

Note that whether you pay back your BT within the interest-free period or not, you’ll still have to pay any stipulated processing or application fees, upfront. 

As for flexible liquidity, once approved, the BT is disbursed in a lump-sum to your bank account. You may use it at your discretion, whether to pay off credit cards, for big-ticket purchases, or to meet emergency needs. 

A balance transfer provide immediate savings 

Table 1: Potential maximum savings on $10,000 credit card balance

	Balance amount	Interest (% per annum)	Interest accrued over 12 months
Credit Card 1	$4,500	26.9	$1,210.50
Credit Card 2	$3,500	25.9	$906.50
Credit Card 3	$2,000	26.9	$538.00
Total interest accrued			$2,655.00
Balance Transfer	$10,000	0	$0
Total interest saved over 12 months			$2,655.00

Note: *Based on Standard Chartered Credit Card Funds Transfer for new customers

As you can see, a BT can save you substantially in interest payments due the high interest charges of credit cards, and how compounding interest works.

Let’s say if we were to take up a BT offer from Standard Chartered ($10,000 loan with a 12-month repayment period at 0% interest), we can not only pay off the balances immediately, we can do so without any additional interest. 

This gives us immediate savings of $2,655 in interest fees. 

Note that this is a simplified scenario, as we’ve omitted minimum monthly payments, late fees and card annual fees. In real life, not being able to pay off your credit card balances can be stressful and confusing, as you’ll need to juggle what can feel like never-ending bills, statements, billing cycles and fees, all the while keeping a keen eye on your budget. 

A balance transfer can save you money on monthly repayments 

Table 2: Potential savings vs Monthly cash payments

	Balance amount	Interest (% per annum)	Interest accrued over 12 months	Monthly cash payment (principal + interest)
Credit Card 1	$4,500	26.9	$656	$431.86
Credit Card 2	$3,500	25.9	$510.22	$334.19
Credit Card 3	$2,000	26.9	$303.25	$191.94
Total interest accrued			$1,469.47	$957.99
Balance Transfer	$10,000	0	$0
Total interest saved over 12 months			$1,469.47
Monthly payment for BT			$833
Savings per month vs cash payment			$124.99

Note: *Based on Standard Chartered Credit Card Funds Transfer for new customers

Let’s consider another scenario. Assuming you decide to pay off your credit card balances over 12 months, making monthly cash payments towards your credit cards, will you end up saving more money than using a BT?

To answer the question, we’ve used this debt calculator by MoneySense to estimate how much we’d have to pay on each credit card each month, so as to clear off our balances over 12 months — the same interest-free period granted by the BT. The results are displayed in the table above. 

In Table 2, you’ll see that the interest accrued over time is much lower compared to Table 1. That’s because in Table 2, we are making regular monthly payments that reduce the principal amount, upon which interest is charged. (If anything, this also serves to show the importance of paying off as much of your credit card balance as you can each time.) 

By following the estimated payments provided by the calculator, we find that we’d need to make combined monthly payments of around $957.99. We have also paid interest of nearly $1,500.

But with a BT, you’ll still end up ahead, saving $1,469.47 in interest charges. Not only that, you only need to pay $833 per month (vs $957.99 without a BT), which means an extra $125 in your budget that you can put to other uses. 

Are balance transfers suited for everyone?

We’ve highlighted how useful BTs can be in this post. But that doesn’t mean they are suitable for everyone in every scenario.

Understand that BTs are only suitable for disciplined individuals with the ability and willingness to clear off the loan within the interest-free period. Failing to do so will incur high interest charges on the balance, which could trigger off a cycle of borrowings just to manage debt. 

Also, BTs have relatively short interest-free periods, with typical 0% interest periods ranging from 6 to 12 months. This adds another challenge to borrowers who do not have the financial ability to pay back the BT within such a short time frame. 

In addition, although you are required to make monthly payments for the duration of your BT, the amount required is minor; 1% of the loan amount, or $50, whichever is higher is typical. This can foster a false sense of complacency towards your borrowings.

One more reason BTs may not be suitable: As the amount you can borrow is based on the credit limit your bank is willing to extend, you may not be able to borrow enough through a BT. 

Before signing on for a BT, always be sure to pay everything off within the interest-free period. Work out a repayment schedule that suits your income patterns (you may want to allocate your bonus towards your BT payment, for example) and remind yourself to stick to it.