With rising credit card defaults, a balance transfer can be helpful for those cardholders who cannot pay their credit card dues in full. The interest rate on balance transfer is lower than the regular interest rate on credit cards and some issuers also provide introductory offers such as zero interest for a limited period, which can be a great short-term solution to pay off your credit card debt quickly.
However, before opting for a balance transfer, understand the interest rates and change in terms and conditions once the introductory period is over. The charges for balance transfer vary from bank to bank, which can range from 0% to 2% per month, depending on the card issuer.
Understand the charges
Many card issuers charge a processing fee of 1-3% of the transferred amount. Some banks may also charge a flat fee for balance transfers. In addition to the interest, a one-time balance transfer processing fee will also be applicable which can range from 100 to300 or even higher, depending on the card provider.
It is important to use the balance transfer facility responsibly as frequent transfers and postponing interest payments may adversely impact your credit score.
Adhil Shetty, CEO, Bankbazaar.com, says, before shifting your debts, check the interest rates, balance transfer fee, duration of the payment and identify if there are any hidden charges. You may opt for cards that offer zero charges on a certain number of transfers. “Also, it may carry a charge and you may choose a card with a low-interest rate to avoid incurring additional charges,” he says.
Paying only the minimum due leads to hefty finance charges on the remaining amount, along with making new purchases ineligible for the interest-free period. Rohit Chhibbar, head, Credit Cards Business, Paisabazaar, says on transferring the balance to another credit card, an individual gets to save on the high interest charges as the entire amount is converted into EMIs at a lower interest rate. “However, not everyone with an outstanding balance on their card would be eligible for a balance transfer offer,” he says.
Compare the interest rates
A cardholder must compare the interest rates on the existing credit card with the rates offered by the new credit card to which he plans to transfer the balance. The idea is to secure a lower interest rate on the transferred balance, as this can significantly reduce the cost of carrying your debt.
The cardholder must check if the new credit card charges a balance transfer fee. This fee is usually a percentage of the transferred balance and can offset the potential savings from the lower interest rate. “It is important to ensure that the new credit card has a sufficient credit limit to accommodate the balance you wish to transfer. If the limit is too low, you may not be able to transfer the entire balance,” says Shetty.
Balance transfer or personal loan
While balance transfers may be a good option, especially if the cardholder is incurring hefty interest on the credit card every month, you would be able to get real value out of this feature only if you are saving significantly and are able to clear your dues timely. A personal loan with a lower interest rate could also be a wise alternative. A personal loan offers longer terms than a balance transfer, making it a better choice if you need more time to repay the debt. On the contrary, a balance transfer with a zero per cent or low promotional interest rate can be a great short-term solution to pay off your credit card debt quickly.
“A personal loan can be especially helpful in consolidating multiple credit card debts instead of transferring balances card-to-card. Moreover, a longer tenure translates to a lower monthly EMI but you would have to pay a higher amount in the long run as interest. Hence, carefully calculate the total cost of each alternative before choosing one, says Chhibbar.
Credit cards may charge you
2-3% a month depending on the card type and late period. A personal loan may be available at an interest rate ranging from 12-20%. An individual can bargain for a lower interest rate based on his credit score and income. Banks would assess the borrower’s profile and offer the loan based on the eligibility criterion.
So, compare your options and opt for the one that puts the lowest financial burden and helps you quickly get rid of debts before it damages your credit score.
CLEARING DEBTS
- Compare the interest rates on the existing card with the rates offered by the new credit card
- The new card should have a sufficient credit limit to accommodate the balance you wish to transfer
- Many card issuers charge a processing fee. Opt for cards that offer zero charges on a certain number of transfers