Why would banks benefit by charging me 0 per cent interest?

Banks must lend money to stay in business, so they make loans. In that sense, a bank benefits when it takes on your credit obligation from another bank.

'Most banks promote credit card balance transfer from another bank to promote account activation and to generate returns on the unused credit limit of customers,' said the spokesman for a foreign bank here.

'The bank will make a return from the nominal fee that the customer pays after deducting the cost of funding the loan,' she added.

But banks want your business for a longer term.

A senior relationship manager with another foreign bank here told The Sunday Times that 'there is the strong likelihood you're a delinquent borrower' if you sign up, and after the promotional first six months, you'll owe Bank B whatever you owed Bank A at the original prevailing

24 per cent interest rate.

How much money will I really save?

Say you have a credit card bill of $10,000 that you would normally need to pay off at an interest rate of 24 per cent a year. The interest payable at that rate for six months is $1,200, plus any late finance charges you may also incur.

If you transferred this to a bank offering an interest rate of 0 per cent for the first six months and a one-time processing fee of 2 per cent, the repayment over the same period of time will be $200.

Think of your processing fee as commission to Bank B for paying Bank A your debt in full first.

In this case, you would 'save' $1,000; or rather, you would have to repay $1,000 less. But don't forget the principal sum of $10,000 still has to be repaid.

Of course, the amount of 'savings' would vary according to your loan amount, and the processing fee of each bank which you have to pay.

Bank brochures typically say you will save 80 to 85 per cent on interest repayments.

How much can I transfer?

Banks will usually take up to 90 or 95 per cent of the available credit limit on your credit card account.

The available credit limit is the amount of credit you have not used yet. And your credit limit is capped, based on the Monetary Authority of Singapore's ruling, at twice your monthly income.

For certain cash lines like Citibank's Ready Credit, however, you can transfer outstanding balances from other credit cards and/or overdraft facilities, rather than the available balance.

No, seriously, what's the fine print?

Ms Gan Ai Im, UOB's regional and Singapore head of cards and payment products, said it is important that you look out for processing fees, the length of the offer period, the interest rate during the offer period, cut-off periods and the applicable interest rate thereafter.

'Depending on the customer's needs, he can then decide on the loan tenure that best suits him,' she added.

Processing fees typically range between 1 and 5 per cent. Generally, the fee rises when you opt for a longer interest-free repayment period.

For instance, DBS gives the option of a six-month scheme and a one-time fee of 2.2 per cent, or a 12-month scheme and a one-time fee of 4 per cent.

Other banks, such as UOB, tier their upfront fees according to how much you transfer. They charge a fee of 2.5 per cent on transferred amounts between $500 and $4,999; a fee of 2 per cent on amounts between $5,000 and $9,999; and a fee of 1.5 per cent on amounts above $10,000.

Beware of certain penalties that the bank can inflict. UOB's application form states: 'Upon any early repayment and/or funds transfer account closure, you will be liable for the full outstanding amount.'

Other banks, like OCBC and Citibank, say they are entitled to cancel or vary the promotional interest rate at any time without giving reasons.

If you default on payment, the bank may withdraw the promotional interest rate, charge you the prevailing interest rate, and even slap on finance charges and/or late payment charges.

'Finally, bear in mind that the preferential interest rates are valid for only a specific period of time and the prevailing rate of 24 per cent per year will be charged when the tenure expires,' said Ms Pamela Tan, head of consumer finance at RBS.

Okay, sign me up, but...

'Calculate the balance that's going to be transferred and your cashflow,' advised ipac's Ms Chenise Lim.

It is important to understand that the one-time processing fee is based on the amount to be transferred, 'so make sure you have the money to make that payment'.

Also, banks are taking on risk when they take on your credit debt, so make sure you are credit-worthy.

RBS' Ms Tan said: 'If a customer constantly faces difficulties in making repayments on time, this will affect the credit standing and lower the chances of approval.'

This article was first published in The Straits Times on December 14, 2008.