Even the most prudent of credit card customers may face situations where they may not be able to pay their dues in full for some reason or other. This would lead to accrual of interest at 2-3% a month on the unpaid bill amount. One can avoid paying such a high interest by using the balance transfer facility of another credit card that they may be holding.
How balance transfer works
To avail of this facility, the credit card that you are planning to transfer the balance to should have a credit limit in excess of the outstanding amount you plan to transfer. Also, you must have a good credit history.
The new bank would process the balance transfer in two ways — by issuing a demand draft (DD) in favour of the other bank for an amount equal to the balance being transferred or by transferring the balance amount to the other bank through NEFT. The process may take 3-5 days.
The balance transfer facility has two advantages. It offers an additional period of about 2-3 months during which you can pay the outstanding balance without paying any interest.
The interest charged by the new bank on the balance transferred could be much lower than that on the earlier card.
The rate of interest on balance transfer can be 1-1.5%; in some cases, even lower. However, a processing fee of 1-2% is also levied on the amount being transferred.
Balance transfer facility allows the customer to transfer even those outstanding amounts that have been converted into EMIs, or convert a lump sum outstanding into EMI.
Let us consider two examples:
Example 1: You have made a purchase of Rs 50,000 from your credit card. However, on the bill date, you could pay only the minimum amount — 5% of the total outstanding Rs 2,500.You have decided to roll over the rest of the amount to next bill cycle.
Now, the bank charges interest at 2.5% a month, and the outstanding amount of Rs 47,500 would attract an interest of Rs 1,187. Therefore, your total outstanding in the next bill would be Rs 48,687, if you have not made any other purchases in the current bill cycle.
If you are unable to pay off the whole amount by the next bill’s due date, the interest would keep mounting on the outstanding amount.
In such cases, you can transfer the balance to another credit card, which gives you a three-month interest-free period to pay off the amount. All you have to do is pay a 1.5% processing fee, which would be Rs 750 if the whole amount of Rs 50,000 is transferred to another credit card. In the process, you save Rs 437.
Example 2: As in the first example, you have made a purchase of Rs 50,000 from the credit card and converted it into 12 EMIs by paying a processing fee of 2% (see table — Option 1). At an interest rate of 2% per month, the total interest paid during the 12 months would be R6,736. Along with processing fee of Rs 1,000, the total cost would be Rs 7,736. However, after paying six instalments, you decide to shift your credit card EMI to another credit card that is charging 0.75% per month for the next six months and a one-time processing fee of 1% (see table — Option 2).
After six months, the outstanding balance on your first card is Rs 26,484. On transferring this amount to another credit card, the total interest payable for the next six months is Rs 700. After including the processing fees and the interest paid for the first six months on the first card, the total cost comes to Rs 6,816 — a saving of Rs 920.
The same credit card company also offers you an option to pay off the remaining loan amount of R26,484 in three months by paying only a one-time processing fee of 2%, which is Rs 530. This way, you further save Rs 435.
Balance transfer is certainly a good option in cases where you are unable to pay back the full amount due on your primary credit card. Used judiciously, this can help you save a lot on interest cost, given you complete the transfer ahead of the bill date.
The writer is CEO, BankBazaar.com