Taking Advantage of Balance Transfers

Tl;dr: borrow at X% pa, get returns of X+Y% pa, profit Y% pa.

Most people find marketing calls annoying, but I don’t mind them very much. Perhaps it’s because one of my earliest jobs was being a telemarketer, and a decade later I still empathise with the utterly restless people on the other end of the line who are sitting in a cold florescent-lit office and going down an endless whole list of people who treat them with rudeness and contempt.

Perhaps it is also the fact that every now and then, telemarketers do provide gems and good deals one might otherwise miss. I have, on a few occasions, gotten various sums of money just by doing simple things like signing up for cards verbally (yay no forks to fill) and transferring fresh funds to a bank account I’ve neglected ($80 and $100, if you can believe it).

These days, telemarketers keep pushing balance transfers, and while most charge ridiculously high interest, some offer the money at really cheap rates. Recently, I got a balance transfer offer of 1% processing fee for six months with cashback of 50% of the fee! This is free money, and I’ll explain why.

What are balance transfers?

For the uninitiated, balance transfers are unsecured loans given by banks, typically tied to your credit card. Nowadays, banks like to tout 0% interest for a certain period of time with a processing fee. The sum of money would be credited to your bank account minus the processing fee, and every month you’d have to repay the minimum balance (typically 1%), and at the end of the tenure you have to repay the remaining amount in full (or suffer crushing credit card interest rates).

For instance, if I took $20,000 under the offer I mentioned above, I would have $20,000 put into my account. This would be my repayment schedule:

• 1st month: $200 (1% processing fee) + $200 (min payment of 1%)
• 2nd month: $198 (min payment of 1% of the $19,800 balance)
• 3rd month: $196.02 (min payment of 1% of the $19,602 balance)
• 4th month: $194.06 (you get the drill)
• 5th month: $192.12
• 6th month: $19,019.80

Total repayment: $20,200 – $100 (cashback!) = $20,100

Ways to monetise the amount

In short, it costs me $100 to borrow the $20,000. What then, do I do with this sum of money? I could put it into a high-yielding savings account: By parking it in a 2.5% pa account, I can generate almost $250 in interest, and that’s $150 of profit.

If I had a much larger risk appetite, I might try to invest the sum, but given the short time horizon I’m not quite sure that’s the most financially prudent thing to do. Talking about financial imprudence, people who find themselves in credit card debt can use this money to pay down their debt and avoid the massive interest for at least six months which gives time for their financial situation to improve.

Singapore law requires banks to publish the effective interest rate (EIR) of each loan offer so you don’t have to calculate much to know whether a loan makes sense. If the EIR is 2% pa and you have a surefire way of generating 2.5%-3% pa or more, that’s money in your pocket. If your debt is generating interests more than this new loan’s EIR, cut down on the interest you have to pay by making use of this balance transfer.

Other odds and ends

Needless to say, you MUST pay your balance transfer in full once the interest-free tenure is up because credit card interest kicks in after that. 25% pa interest rate really shouldn’t be legal but it is.

Annoyed by telemarketing calls? Tell them you want an EIR of 1.5%! Some telemarketers check with their supervisors if they can offer you a better rate. If it works out, you now have a cheap loan.

If not, you’d usually hear the telemarketer sounding slightly defeated before ending the call, and you didn’t even have to be rude about it.