Credit cards have become a part of life in Malaysia. But as much as they make life a lot more convenient; credit cards can also lead to an unmanageable amount of debt. In some cases, credit cards have even led to bankruptcies.
If you have a credit card debt that seems to be spiralling of control, it may be the right time to consider debt consolidation. In Malaysia, there are two common debt consolidation methods that are highly workable.
1) Credit Card Balance Transfer
Credit Card Balance Transfers involve the transferring of money that you owe on your current credit card account to a new credit card.
Balance transfers offer a number of different benefits, including lower interest rate and the ability to simplify your credit card debt payment process.
How Credit Card Balance Transfers Can Work for Debt Consolidation:
● If you have accumulated a significant amount of credit card debt, there is a good chance you are currently being charged the maximum interest rate. Based on the tiered interest rate structure adopted by banks in Malaysia, this maximum rate is generally 17.5% p.a.
● If you are paying the maximum interest rate, you are probably finding it quite difficult to keep up with your credit card debts. High interest rates can cause your credit card balance to rise quickly. For example, if the amount you owe on your credit cards is RM10,000, you are essentially adding RM146 in interest to your debt each month.
● A credit card balance transfer could give you a break from paying high interest. In some cases, you'll find balance transfer programmes that offer zero interest rate, at least for the first year or so. By taking advantage of one of these offers, you will have a better chance of paying your debt off.
● Banks often charge a once-off fee of 3% when transferring a credit card balance. However, in the long run you will still end up paying less, due to the lower interest rate.
Example of How Much You Could Save:
Credit card average maximum interest rate = 17.5%
Lowest known interest rate for balance transfer (for a limited time) = 0%
Amount you could potentially save on interest (for a limited time) = 17.5%
2) Personal Loan
The concept of taking out a personal loan in order to pay off credit card debts might sound a little unusual. However, if you take a strategic approach by taking advantage of interest rate differences between personal loans and credit cards, this method can actually work quite well.
How Personal Loans Can Work for Debt Consolidation:
● If you have accumulated a significant amount of credit card debt, there is a good chance you are currently being charged the maximum interest rate. Based on the tiered interest rate structure adopted by banks in Malaysia, this maximum rate is generally 17.5% p.a.
● The interest rates on many personal loans are far lower than credit card maximum interest rates. For example, some personal loan interest rates in 2013 can be 9.88% p.a. or less, depending on your loan amount and term. If you are a government servant, the rate dives even lower.
● If you take up a personal loan with significantly lower interest than a credit card’s, you could technically be paying much less over the long run. The savings you’re getting from your interest could even help offset the charges and fees associated with the application for a personal loan.
Example of How Much You Could Save:
Credit card average maximum interest rate = 17.5%
Known interest rate on a personal loan = 9.88%
Amount you could potentially save on interest = 7.62%
This article is brought to you by iMoney.my - the first website in Malaysia comparing credit cards, loans and mortgages - free of charge and independently.
Finance Malaysia would like to thank Alex Yeoh for his input in this article. Alex is a Licensed Financial Planner with VKA Wealth Planners, whom can advise and distribute multiple PRS products. You may contact him via email alexyeoh@vka.com.my
