Tuesday, February 5, 2013

Refinancing Credit Card Debt


Dear Investor Juan,

I recently made a major purchase which I charged to my credit card. I have the money to pay for the full amount charged. But I came across an offer of BPI that I can do a balance transfer at 0.59% and would be pay roughly Php2800.00 for 18 months where I would end up paying an interest of around Php4800.00.

I am leaning toward on transferring the balance to BPI and just invest my money on a UITF. Is this a good idea? Thinking that I would not be losing any money and would end up earning the interest I paid for or earn even more for 18 months.

Thank you in advance.


Dear Investor Juan,

Anonymous inquiry made me think as well. Hope to here from you soon on your take on this. Because I will also spend a large amount next month and if this is a wise choice to take.

Having a quick look at BDO's Balance Fund performance for the last 18 months an 80K investment yielded more than 20K. If I do a balance transfer I would be paying a total interest of around 8500 and will be paying roughly 5k a month. It seems a wise choice a first glance but would really like an experts advise.

Follow up on my inquiry above. Below is the computation for the balance transfer:

Php 80000/18months = Php 4444.45

Php 80000 x .0059 = Php 472.00
Total Monthly Amort. Php 4916.45

Total to be paid for 18 months
Php 4916.45 x 18 = Php 88496.10

Total Interest for 18 months.
Php 88496.10 - Php 80000.00 = Php 8496.10


Dear Anonymous and Anthony,

So basically, the issue is whether to accept BPI's offer to "refinance" your credit card debt or just stick with your default credit card. To make a sound decision, you would have to compare the costs of the two alternatives: at first glance, BPI's offer seems to be the better choice, hands down, because 0.59% is significantly lower than the 3 to 3.5% monthly interest credit cards usually charge. But from from Anthony's example, the quoted 0.59% refinancing charge is actually a monthly add-on interest rate, which if you recall this past post about the topic, can lead to bad and costly decisions if interpreted and used incorrectly.

To make a "correct" comparison, we can convert the add on rate into a monthly compounded (or "effective") rate, which we can then compare to the rate often quoted by credit card companies. Using the same procedure described in the "Add On Interest" post, the monthly compounded equivalent of BPI's offer is 1.08%, which is still lower than the usual monthly financial charge of credit cards.

So there, it's pretty clear that BPI's offer is actually a good one--at least better that what your credit card would otherwise charge.

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