I have talked about balance transfers before, but for those who haven’t, I hope this gets you acquainted with the idea. Even for those who know what a balance transfer is, I’ve discovered a thing or two you may not know, so you might want to read on for more.
Whenever I talk about balance transfers, there’d be people who say that this “destroys your credit rating” or that such a practice is “dangerous”.
First, we have to recognise that the obsession over credit report is quite overblown in Singapore’s context. While one’s credit score is very important in places like America where loan approvals and even interest rates are determined by the credit score, the credit report score is something of questionable importance. We have plenty of people with CC/DD qualifying for cards and mortgages, and people with AA being rejected for loan applications. Unless you default on your payments, I don’t think there is anything to worry about and the credit score is as relevant to a working adult as one’s PSLE results – it likely doesn’t matter in most scenarios.
As you might imagine, I am someone with many, many credit cards (more than 30 and counting), and have taken balance transfers here and there on top of using large amounts of my credit limit at once. I can only speak from personal experience that my mortgage as well as refinancing went through without a hitch, and I’ve never been declined for a card application in years. There are people who echo my sentiments, and of course those who want a pristine credit score to match their O Level grades, I suppose, and that’s entirely up to you to choose.
On the issue of balance transfers being “dangerous”, just about every financial product has the ability to lend you in hot soup if used improperly. Mortgage? Foreclosure! Credit cards? High-interest debt! Metal credit cards? MRI hazard!
It’s the same with balance transfers and if you think you have any chance at all to not pay your balance transfer on time and thus land in debt, please skip this article entirely. I’m just sharing what I know and you should always do your own due diligence when embarking on any particular financial strategy or taking up any product.
Pay off credit card debt
Anyway, a balance transfer can be used for a few things. Mainly, it is a no-brainer loan to get if you are in high-interest debt. For someone unable to pay a credit card debt generating more than 25% p.a. interest, borrowing money may seem like the last thing to do, but it makes sense when using a balance transfer saves him/her interest.
Earning extra bucks
For those who are not in credit card debt, balance transfers are still an interesting way for earning some extra bucks which I explored in my previous post.
Based on a balance transfer with processing fee of 1.5% and bank account that gives us 3.8% p.a. interest, here is what we can expect from a S$20,000 balance transfer:
|Month||Opening Balance||Interest Earned||Repayment (1%)||Loan Left|
|Start||$19,700||-$300 (1.5% fee)||$20,000|
|Month 6||$19,024.93||$60.25||Full repayment||0|
|Net Profit: $67.84|
Ways to increase the earnings
It doesn’t seem like much, but there are quite a few ways we can increase our earnings.
Method 1: increase the returns on the amount
If we found a bank account that gives 5% p.a. returns, the profit after paying the fee becomes S$185.22 for a S$20,000 balance transfer. This can be achieved with the UOB One Account, and arguably the interest rate is a lot higher if you already some S$75,000 sitting in the account.
The UOB One gives interest in a “top-heavy” manner; the final S$25,000 of a S$100,000 balance in UOB One attracts 7.80% p.a. interest! So if you already have S$75,000 in your UOB One account, your balance transfer earns some S$761.40 of interest over 6 months, which results in a S$461.40 profit after paying the balance transfer fee of 1.5% (S$300). This assumes that UOB One continues its rates unchanged over the next 6 months.
Method 2: increase the balance transfer amount
We could also increase the balance transfer amount, either by using more of our credit limit with the bank, or taking out multiple balance transfers with different banks. If S$20,000 earns us S$67.85 at 3.8% p.a. interest, S$60,000 could possibly earn us S$203.55. And we could repeat this every 6 months or so, depending on rates.
Do note that there is a MAS regulation that one’s unsecured lending cannot exceed 12 times of their monthly income, so someone who earns a monthly salary of S$5,000 should not exceed S$60,000 of unsecured borrowings.
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Method 3: find balance transfers with lower rates
The final method to increase the earnings we can get is to find balance transfers with lower rates – obviously – but the way to find them may not be the most intuitive.
While Googling may be the most intuitive way we find stuff, the best balance transfer rates seem to come from telemarketing calls. As someone whose first job right after NS was being a telemarketer, I try to be as nice to them as possible – I usually say firm but polite no’s if I’m not interested before hanging up.
But ever so often, a telemarketer comes to me with a balance transfer offer, and that’s where things get interesting. Somehow, they tend to have better rates than what you’d find online. I recently got an offer for around 2.5% p.a. effective interest rate, but it was unfortunately from a bank where I had a pretty low credit limit. I’ve even asked telemarketers if they had better rates than their current offer, and they sometimes are indeed able to get back with lower fees.
So, be nice to your telemarketers since you don’t know what good deals they can bring you.
How about a free balance transfer?
Even better than a cheap balance transfer, I found a way to potentially get free balance transfers. That’s right – pure profit without fees to pay. It involves a small workaround, but it seems easy enough once you get things set up, I see this as free interest from your bank account.
If you want to know how you can accomplish this, do tap here to see the ways you can qualify.
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