April 30, 2008

Credit Card Balance Transfers

Posted in debt at 9:53 pm by kimsan23

I once was offered a unique opportunity by a bank.  They don’t do this anymore now I think because nowadays they prefer that the interest rate be based the full balances after each payment cycle.  This was a smashing good deal for me about 8 years ago!

There was a time when I closed one of my credit cards and transferred the balance to another card.  Instead of paying 2.5% interest every month, I enrolled in a balance transfer program where interest rate was 1.5% per month for 6 months (fixed rate installement).  The amount was 10k.  The balance transfer rate allowed me to pay a pre-computed installment of P1,666.67 + P25 (interest) = 1,691.67 per month.  In total, I had to pay an interest rate of P150.  My 10k debt would have been charged like this if I had continued paying 3k per month at 2.5% monthly interest.

Month 1

  • P10,000 – P3,000 (1st payment) = P7,000
  • P7,000 + P175 (2.5% of 7k) = P7,175 – payable the next month

Month 2

  • P7,175 – P3,000 (2nd payment) = P4,175
  • P4,175 + P104.38 (2.5% of 4,175) = P4,279.38 – payable next month

Month 3

  • P4,279.38 – P3,000 (3rd payment) = P1,279.38
  • P1,239.38 + P30.98 = P1,270.36

Month 4

  • P1,270.36 ->total payable

Total interest paid: P175 + P104.38 + P30.98 = P310.36

That’s a difference of P160.36

In retrospect, I am glad I did that balance transfer.  It did save me a bit of money.  Still, if you should ever plan to do a balance transfer, try to compute it first and see if you end up paying more in interest or less.  Some people I’ve spoken with ended up paying more in interest because of the time stretch.  That actually means that the monthly amount  they were paying at a higher rate was way over the minimum, enough to slash off a big chunk of the debt.  For example, if I has been able to pay 5k per month on a 10k debt, this is how much I would have paid in interest:

Month 1

  • P10,000 – P5,000 (1st payment) = P5,000
  • P5,000 + P125 (2.5% interest) = P5,125 payable next month

Month 2

  • P5,125 – P5000 (2nd payment) = P125

At this point, you can just pay the P125 excess of make it roll into the next month.

Month 3

  • P125 + P1.25 = P126.25 – Total interest paid

The difference is small but it’s loose change at the end of the day.

Now, this is just an example of what happened when I did my one and only balance transfer.  You need to check the following things with the bank before you compute.

  1. Formula for computation. The formula above is the exact formula I was given.  But different banks have different ones.  Some base the interest on total amount due after every payment, just like a regular card, only with a smaller interest and a shorter time frame.
  2. Payment plans and options. You need to know and plan your budget for a fixed installment like this.
  3. Penalties. If you miss a payment what happens?  How will it be computed?
  4. Cancellation. What happens when you cancel?  Is there a service fee?

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2 Comments »

  1. CashQuest said,

    I see you have got yourself a good deal there. Balance transfer is an excellent way to manage some of the debt.

    I remember once we had a bank with a flat 2.5% interest chargeable for 6 month on the principle amount ! A lot of sign-up when they had that promotion.

    However, nowadays, markets are volatile due to oil and sub-prime crisis. Financial institutional are more cautious.

  2. kimsan23 said,

    It was really a good deal! You’re right, nowadays, they’re not as generous.


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