Credit Card Balance Transfer: All You Need To Know

What is a Credit Card Balance Transfer?

Credit card balance transfer is a facility to transfer high-interest credit card debt from one or more credit cards to another card with a lower interest rate. This can make debt management easier and more affordable, thus helping you save money. Many credit card issuers or banks allow this facility with their credit cards.

How Credit Card Balance Transfers Help

1. Helps save money

By transferring outstanding debt to a lower-interest card, balance transfer can reduce your debt significantly, especially if you transfer the balance to a card with a 0% introductory Annual Percentage Rate (APR).

2. Helps with debt consolidation

If you’re looking to consolidate multiple credit card balances for easier management, a balance transfer can be immensely useful. By doing so, you can streamline your monthly payments onto a single credit card, making the debt easier to manage.

3. Faster debt clearing

Balance transfer can help fetch you a lower interest rate, or in some cases no interest rate for a limited period. In such cases, a majority of your repayments go directly toward reducing the principal balance which can help you pay off your debt faster.

The Process of Credit Card Balance Transfer

If you have decided on a balance transfer, the first step will be to find a suitable card that meets your requirements. Some credit card companies offer promotional terms on balance transfers which can include low or even 0% introductory APR for a specific period. This period usually ranges from 6 to 18 months. This promotional period can be immensely helpful in allowing you to make interest-free payments on your transferred balance.

As you search for the right credit card, make sure to check your credit score. Since a balance transfer application is considered a new application, the bank or credit card issuer will conduct a credit score check. This will be recorded as a hard inquiry on your credit report and may temporarily affect your credit score.

If your credit score qualifies the chosen lender’s criteria, apply for the card. Once your application is approved, request the new credit card issuer to initiate a balance transfer. You will need to provide the details of your old credit card account, including the account number and the amount you want to transfer.

The new credit card issuer will process the balance transfer, which can up to a few days or weeks to conclude. During this time, be sure to make at least the minimum payments on your old credit card to avoid late fees or penalties.

For instance, you have a credit card bill of Rs. 1 lakh with a 3.5% APR per month. If paying it off in full is difficult, consider a balance transfer to a card with a lower or 0% APR.

Suppose you have two options:

• Card A: 0% APR for 2 months, 2% processing fee.

• Card B: 1.7% APR for 6 months, no fees.

In 2 months:

• Stay with your current card: Pay Rs.7,000 in interest.

• Card A: Pay Rs. 2,000 processing fee, no interest.

• Card B: Pay Rs. 3,400 in interest.

In 6 months:

• Current card: Rs. 21,000 in interest.

• Card A: Rs. 16,000 total.

• Card B: Rs. 10,200 in interest.

Card A works better for 2 months, while Card B is ideal for 6 months.

Fees on Balance Transfer

1. Introductory rate

Depending on your credit score, some banks may offer a low or even 0% introductory interest rate on balance transfers for a limited period. This would be the best time to pay off as much of your dues as you can afford to as you’ll save on interest payments while reducing your outstanding balance. Once the introductory period ends, the interest rate could be significantly higher.

2. Balance transfer fees

Some credit cards may levy a balance transfer fee, ranging from 1% to 3% of the transferred amount. Some banks may charge a flat fee, while others might calculate the fee as a percentage of the balance being transferred. Make sure you read the terms and conditions of the balance transfer as fees for it can vary for different banks and card issuers.

Should You Consider Transferring Your Credit Card Balance?

If you are struggling with high-interest debt, a credit card balance transfer is a great way to reduce your debt burden faster. You can transfer your debts to a card offering lower interest rates while paying the minimum due on your existing card. If you have multiple cards with high debts, transferring the dues to a single card can help with easier debt management. Additionally, you can avoid the extra interest you’d otherwise have to pay for the outstanding dues.

Before applying for a balance transfer, find out the associated charges and terms, as well as how it can impact your credit score.

Adhil Shetty is the CEO of BankBazaar.com