Credit cards, despite being convenient, come with potential risks, the most common being, the possibility of losing track of one’s spending. According to a study by MIT Sloan they motivate spending by exploiting reward networks in the brain, which may become sensitised through reinforcement and conditioning processes. In fact, credit card billing continues to be significantly high in Singapore, staying above the $40 billion mark.
Of this amount, the rollover balance hovers around the $7 billion mark. This number indicates the outstanding credit card balances that remain unpaid after a billing cycle. For those considering their options, this article will help shed more light on which to pick—personal loans vs balance transfers—when managing debt
Banks and other select financial institutions offer balance transfer programmes specifically targeted at resolving outstanding credit card debt. These programmes are usually attached to a credit card or to a line of credit facility. Borrowers are allowed to transfer outstanding balances from one or more of their existing credit cards to a new card from a new bank. In short, you will be able to consolidate all your outstanding debts into one credit card.
This new balance transfer card usually offers low interest rates, or more commonly, 0% interest rate for a limited time. Card holders are encouraged to settle all their outstanding debt on this balance transfer credit card within the interest-free period in order to avoid accruing higher interest rates.
In short, these programmes serve as a more affordable alternative, allowing credit card holders to save costs while settling their outstanding credit card balances.
Balance transfer credit cards usually offer 0% interest rates or relatively low interest rates on outstanding balances that you transfer to the card. This low or zero interest rate period, however, is usually limited to a period of 3 months, 6 months or 12 months. After this period, the prevailing credit card interest rate on outstanding balances will come into effect.
Balance transfer credit cards offer you the benefit of lower interest rates, provided you are able to pay off your debt within the stipulated time. It is important to understand that balance transfer cards have two different types of interest rates, namely the Advertised Rate (AR) and Effective Interest Rate (EIR)
To explain in brief, the balance transfer provider will state that the interest you need to pay within the limited repayment period will be 0% or some other relatively low rate. However, this does not take into account any additional fees you will need to pay. Usually, you’ll have to pay a one time fee when transferring your balance, and when this is factored in, the rate you’ll pay is known as the EIR.
EIRs on balance transfer cards are still very affordable compared to prevailing credit card interests in normal circumstances. They range from about 1% to 7%, as opposed to prevailing interest rates of 20-30%.
There are several key differences between a balance transfer programme and personal loans. The main difference is of course the interest rates charged and the repayment periods.
Here is a comprehensive list of the differences between balance transfers and personal loans.
Choosing between balance transfer programmes and personal loans for the purpose of debt consolidation and resolution depends on several factors. Balance transfer programmes offer more affordable interest rates overall. However, this only if you are able to finish repaying your outstanding credit card balances within the interest free period, which is usually 12 months and less. You will have to divide your outstanding balance with this period and determine your affordability.
If your debts are too high to be settled within a year or less, you may have to spread them out over a longer period of time. This is when personal loans become a more viable option.
Choosing the best debt resolution plan really depends on your situation. We recommend balance transfers if you can confidently repay the full amount within the introductory low or zero-interest period. If you are unable to repay the loan within the timeframe provided by the balance transfer offer, then personal loans, which offer fixed interest rates and a structured repayment plan, might be the best way to go.
Whether it’s a personal loan or a balance transfer, Lendingpot loan marketplace can help you find the best financing options to meet your needs. All it takes is a 2 minute form to access tailored offers from the partners on our platform. Apply now!
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