Due Diligence. Useful, but comes with strings attached

Unable to pay credit card dues and losing sleep over the huge 36 per cent interest a year? You can sidestep the trouble by going for ‘balance transfer’. This scheme, offered by many banks, allows you to transfer dues from a card which charges high interest to another which offers a lower interest rate and flexible payment terms.

Banks offer this largesse to increase their credit card customer base and asset size. So, you can transfer balances between cards issued by different banks, but not between cards of the same bank. For card holders, balance transfer means less outgo and more breathing space.

With credit card debt among the costliest in the market, this can translate into tidy savings. It also helps consolidate dues — from many credit cards to one or two — thus giving you more control over your finances.

It’s not all rosy though. There are many strings that come attached with balance transfers.

Banks are picky about whom they offer the facility to. Your bank may not allow balance transfers, if you are ‘overdue’ on either the card issued by it or by the other bank. This happens when the minimum amount due (generally 5 per cent of the total bill amount) has not been paid. Also, your bank will not allow you to transfer balances if the credit limit on its card has been exceeded. Some banks also don’t allow the facility on cards less than six months old.

As against the usual high rates of 3-4 per cent a month on credit card dues, balance transfers are generally offered at concessional interest rates — from zero per cent to 1.5 per cent a month. But then, these are limited period offers — usually ranging from two to six months.

The balance transfer due can be paid over the limited period through EMIs, which is the most common payment option offered by banks. The EMIs become part of the minimum amount due each month — slipping up on the payment can transport you back to the high-interest zone.

Some banks allow you to stagger the balance transfer payment over the limited period, instead of insisting upon EMIs. Here too, if you don’t settle within the time allowed or default on the minimum amount due each month, high rates of interest will kick in.

Some banks offer longer tenures (one to three years) to pay off the amount and a few don’t even insist on a timeframe (perpetual balance transfer schemes). But these could be costlier, as the interest rate may be higher for longer tenures.

In any case, the balance transfer amount forms part of the overall credit limit, and so will restrict the extent to which you can use the card for other spends. Also, remember that the concessional interest rate applies only to the balance transfer amount and not to the other expenses incurred on the card.

There may be conditions on the minimum (say, ₹5,000) and maximum amount (for example, 75 per cent of the available credit limit) that can be transferred. Besides, some schemes in the non-EMI category can be quite restrictive. For instance, there may be no free credit period allowed for fresh purchases as long as the card has a balance transfer component. In such schemes, it is best to first settle the balance transfer amount and only then go for fresh purchases.

Also, in balance transfer on EMI schemes, you may not be allowed to prepay a part of the balance. Prepayment would have to be for the entire remaining balance, and foreclosure charges of up to 3 per cent may apply.

They may charge lower interest, but balance transfers on credit cards entail processing fees. This could range from 1 per cent to 2 per cent of the amount transferred. Besides, service tax is levied on the processing fees, interest component and foreclosure charges. All this adds to your cost.

Finally, if you think you can keep transferring balances from one card to another , that’s not a bright idea. It will land you in a debt trap. Also, it will result in a poor credit score and curtail taking future loans.

Use credit card balance transfers for what they are meant — tiding over a temporary difficulty. Read the terms and do the math before you sign on the dotted line.

Go for schemes with minimum restrictions and low overall costs including processing fees, interest rates and foreclosure charges. Better still, try to avoid getting into a balance transfer situation by being disciplined in your spending and payment behaviour.

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