The term is quite obvious itself; it means to transfer your existing debt from one provider to another. People usually use this tactic to get reduction in interest on payments. Sometimes, even to compile all the debts into one easily manageable monthly sum.
The introduction seems very attractive but there are a plethora of things that you have to consider before applying for a balance transfer credit cards.
How Balance Transfer Works
The balance transfer is simply shifting your older credit card debt to a new credit card. A balance credit card is swapped to pay the debt on your older credit card. Now, you have to repay the debt to the new credit card provider.
It can be beneficial if you had a high interest rate on your previous credit card and you repay the debt with the help of a balance 0% credit card. In this way you will not have to pay any interest until the deal expires.
If you repay the debt in the time period till deal persists then you can effectively have an interest free credit.
Balance Transfer Fees
When you use these cards then you can potentially save thousands of rupees while transferring from a high interest card to low interest card. Then, why do banks encourage these cards?
The banks can make money in two ways. First is, if you fail to repay the debt in 0% interest period then you will have to pay the interest after that. Second, they charge a fee for the balance transfer fee.
The average balance transfer fee is 3% of the balance that needs to be transferred. If you are going to transfer 50,000INR then 3% of this would mean you have to pay 1,500INR as fee. There are cards with fewer fees but their 0% interest period is shorter.
Most of the balance transfer cards would insist you to transfer about 90-95% of the credit limit of your old card. The providers don’t want you to be too thin.
You might get intimidated by the balance transfer fee but you will possibly be saving a significant amount of interest every month.
You can also consider a card that does not charge any balance transfer fee but has a sufficient 0% interest period. If you can clear the debt in that period of time then it’s the best option. You will undoubtedly need a good credit score to get the best balance transfer credit card deals.
Things to remember
- Reckon the time you will need to pay of all the debt. The calculation is pretty simple; just divide the total debt you have by the amount you can afford to pay every month.
- Take help of online comparison tools to find the best deal for your credit score. Search for those credit cards that have sufficient length of 0% interest period.
- Check for the affordability of the fee taken by the provider to transfer the balance.
- Choose the card that has the perfect match of 0% interest time and low balance transfer fee. Do not use this card to purchase anything.
Points to Keep in Mind
The interest on purchases: You should not use your balance transfer credit card to purchase anything as when the 0% interest period is over it will get back to 18% interest.
Card companies should be different: it is worth mentioning that you cannot transfer your balance in the same credit card company itself. For example, if you have an Axis bank credit card then you cannot apply for the balance transfer card in it.
Clean credit history is a must: The best deals are preserved for those who have a clean credit history as the banks are sure that you will be able to repay the debt.
Don’t be desperate: If you apply for too many credit cards in short time then it will only affect your credit history in a negative way. Similarly, do not switch cards too often.
Stick to the rules: Once, you have received the balance transfer card and you are all set to clear your previous debt. Now, is the time to stick to the rules as failure to abide by the rules may result in default.