Know the ins and outs of balance transfer

Manish, a trader, has a credit card which he isn't quite happy with. He currently has an outstanding balance on the card and is looking for an option that will not necessitate him to pay off his dues immediately, and at the same time enable him to do so without any additional interest added on to the existing outstanding balance, as he was in the habit of paying only his minimum amount due in the past. Manish should opt for balance of transfer facility.

How it works

It is a facility offered by credit card issuing companies to card holders wherein the outstanding balance on a credit card can be transferred to a less used card or a new card.

Banks provide incentives for customers who use balance transfers by providing a lower interest rate or offering an interest-free period.

When an individual opts for a balance transfer, the new card from which the facility is being used will lower the credit limit proportionately to the balance transfer amount.

So if your credit limit is Rs 100,000 and you have opted for balance transfer to the tune of Rs 40,000, your credit limit will be reduced to Rs 60,000. But note that the balance transfer limit cannot exceed 80 per cent of the credit limit.

Banks may offer you the facility often enough. But when is the Balance transfer facility best used?

Resetting the interest rate charged : If individuals face a situation where the interest rate charged by a new credit card is lower than what is charged by the current credit card, interest cost could be reduced by transferring the outstanding balance to the new credit card.

Dissatisfied with the service : For those individuals who are not happy with the service provided by the current credit card company, due to issues such as improper billing, non receipt of bill among other things, can opt for balance of transfer.

The individual can transfer the balance of such a card to another card and get rid of the old card.

Inability to finance the debt : If an individual has a high outstanding balance on a card and is unable to finance it because of a short term liquidity crunch, or if the individual has an exorbitant amount of high cost debt to pay-off, balance transfer can come as a temporary relief. But remember that balance transfers do come at fairly high interest rates and you are only postponing the repayment.

What are the costs involved?

In order to induce customers, banks offer a low rate of interest or sometimes even zero-interest on balance transfer for a specified period. What is noteworthy is the fact that these attractive rates (zero or low rates) are valid for only an introductory period that is, three to six months, after which the bank will start charging you the normal rate of interest. A processing fee is also levied by banks which can be in the range of two to five per cent of the total amount.

Let us take the example of Bank ABC which offers two plans for balance transfer:

Transfer at 0 per cent interest rate for 3 months, 2.95 per cent interest rate after the 3{+r}{+d} month and 2 per cent processing fee or Rs 199 whichever is higher.

Transfer at 0.75 per cent for 6 months, 2.95 per cent interest after the 6{+t}{+h} month and 1 per cent processing fee or Rs 100 whichever is higher.

What is the process?

Inform the credit card company to whom you want your outstanding debt to be transferred to.

Fill and submit the form provided by them with details pertaining to your old credit card along with a copy of your latest credit card bill.

Within 7-10 working days, the credit card company will send you a demand draft (DD) in favour of your old credit card issuer . After having submitted this DD to your old credit card company, your outstanding debt gets cleared and the same is transferred to the new credit card issuer.

Points to note

Balance transfer processing takes 7-10 working days. While you're waiting for the balance transfer to get through, there are chances that you might miss the due date for payment on your old card. That means you haven't paid the minimum amount which accounts for default and can affect your credit report. So make sure you pay the minimum due amount when the balance transfer is getting processed.

Keep track of the period for which you enjoy low interest or zero interest and make sure you pay off your dues within that time frame. Any purchases and expenses on the card on which you have opted for balance transfer will not fall under the low or zero interest purviews.

To make the most of the balance of transfer facility, make sure you make the maximum payment during the low interest or interest-free period so that your finances are not impacted when the interest rate kicks in. Also, moving from one card to another just provides you with temporary interest relief. Take advantage of that and reduce your dues. Remember, the credit card company is betting on you not clearing the debts on time as that makes it possible for them to charge an interest for the credit amount yet to be paid.

(The author is CEO, Bankbazaar.com)

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