Having outstanding credit card debt is bad news. As the high interest rates compound over time, it makes it even more difficult for a cardholder to repay their debt. Furthermore, late payment penalties are levied over the interest that can be as high as 40% per annum. So is there any solution to get out of this debt trap?
You can opt for a credit card that allows you to transfer your outstanding debt to another creditor who offers lower interest rates or better repayment terms. Keep scrolling to learn when you should consider a credit card balance transfer.
What Is a Balance Transfer and How Does It Work?
A credit card balance transfer is the process through which an individual transfers their outstanding credit card balance to another lender. However, not every credit card lender supports the balance transfer facility. Therefore, one must ensure that this facility is available beforehand.
During a credit card balance transfer, the new lender pays off your outstanding debt while the existing lender closes your credit account. The outstanding debt is then transferred to your new credit card account. The new lender may offer you an interest-free period to repay the debt you owe. During this buffer period, the interest charges are either very low or, in some cases, nil.
However, the transferred amount will be deducted from your new overall credit limit. This way you can reduce your financial liabilities and repay your debt much more conveniently. In the sections below, we will be discussing when you should be considering a balance transfer, and its pros and cons.
When to Consider a Credit Card Balance Transfer?
Here are some situations in which you may consider transferring your credit card debt to another lender:
- For Better Interest Rates and Rewards
While selecting a credit card, you may have chosen the best card available in the market that was once offering low-interest rates. However, with time and evolving markets, it’s a possibility that you come across another lender offering better interest rates and rewards on credit cards. This is when you may consider transferring your balance to the lender who can add maximum value to your credit card purchase.
- Need for a Restructuring
The terms and conditions you accepted years ago may seem financially constraining now. For example, you may want to switch to credit cards with a higher credit limit. In that case, you may consider a credit card balance transfer to avail upgraded features. This would also allow you to restructure your loan repayment terms, provided you have a good credit score.
You can also opt for a balance transfer to increase the tenure of your loan. This will lower your monthly EMIs, making it easier for you to clear your debt.
- Mounting Credit Card Debt
If your credit card bills are piling up and you are having trouble paying off the interest rates and penalty charges, you might want to consider a credit card balance transfer. This would let you negotiate for a lower interest rate so that you can pay off your existing debt conveniently. Furthermore, the interest-free period may also allow you to get enough cash flow to suffice your credit card debt.
What Are the Advantages of Credit Card Balance Transfer?
Read the following section to discover some advantages of credit card balance transfer
- Maintain a Good Credit Score
Credit scores define an individual’s creditworthiness. Failure to pay credit card debt on time can adversely affect your credit score. Therefore, if you ever sense that you do not have enough funds to support your monthly credit card payments, you can seek a balance transfer. This will help you avoid defaulting on your loans and keep your credit score unaffected.
- Get More Time to Arrange Funds
If you do not have enough funds at the moment, you can take advantage of the buffer period after a balance transfer to arrange for funds. Furthermore, you can approach the new lender to change the terms of your credit card debt. During this time, you can look for a new job or an additional gig to support your repayments.
- Access to More Value Adding Rewards
A balance transfer facility can let you apply for a card offering better rewards and benefits on your credit card purchases. This way you can reap maximum benefits from your credit cards. However, you should carefully go through the applicable charges and hidden costs before applying for a new credit card.
Things to Consider before Transferring Your Credit Card Balance
Here are some of the essential things you should consider before transferring your credit card debt:
- You May Have to Pay Additional Charges
Some banks levy additional service charges for balance transfer facilities. This may cost a certain percentage of your transfer amount. Although it may not seem much, this charge will affect your overall profit.
In addition, the interest-free period offered by the new creditor does not last forever. Therefore, borrowers need to understand the repayment structure before selecting a suitable lender.
- Need an Excellent Credit Score
To negotiate for a better loan term, you will need a desirable credit portfolio. In general, lenders prefer borrowers with long credit histories and timely repayments. Furthermore, if the credit scores are not up to the mark, it may make it harder for borrowers to search for a suitable lender.
- Cost Benefit Analysis
Before applying for a credit card balance transfer, you must ensure that the transaction is effective and your savings are more than the applicable charges. This way you can compare lenders by checking if they add maximum value to a credit card balance transfer.
Furthermore, remember that the low-interest rates are only applicable to the transferred debt. Thereafter, standard interest will be applicable for any fresh credit taken.
- Deal With Multiple Credit Card Debt
You can transfer your credit card debts on multiple credit cards to a single lender. For example, you can pay off a debt of ₹10,000 each on two distinct cards via one credit card with a credit limit of ₹30,000. This way you can narrow down multiple due dates to a single date which can make repayments way more convenient.
Credit card balance transfer can be an effective means of dealing with piling debt. However, one must carefully analyse lenders based on their offers to avail the best balance transfer deal that suits their financial requirements.
Furthermore, remember to check for the standard interest rate on the new credit card, to ensure that you have enough cash flow available to repay the debts on time.
Frequently Asked Questions
- What if my amount of transfer is greater than the new credit limit?
If your balance amount is greater than your credit limit, only the permissible amount within the credit limit will be transferred to your new account. The rest will remain on your older account, with all the due interest. However, you can request your new lender to extend your credit limit, so that you can transfer the credit in whole.
- How long does it take to process a credit card balance transfer?
A credit card balance transfer process may take up to a week or a month to complete. However, the actual duration may vary from one card issuer to another.
- What is the processing fee for balance transfer facilities?
The processing fee applicable on credit card balance transfers may range from 1% to 3% depending on the respective lender’s policy.
- For how long does the interest-free period last during a balance transfer?
The interest-free period may last up to 180 days. However, the buffer period may vary as per different lenders. You should get the terms cleared with your new lender before applying for a new credit card.