Some people become overwhelmed by unmanageable debt because of their financial choices related to credit cards. This debt not only damages your credit score but also impacts your overall financial health. It can be difficult to pay off the dues as the debt grows due to charges like interest rates and late payment fees. In such cases, many find it better to use the ‘Balance Transfer’ facility to avoid high interest on their outstanding balance. But is it truly a good idea? Keep reading to learn more!
What is Balance Transfer & How Does it Work?
A balance transfer allows you to move outstanding debt from one credit card to another, usually to a card with a lower or 0% interest rate. The goal is simple: save on interest and repay the debt faster.
Here’s how it works:
- Apply for a credit card that offers 0% introductory APR (Annual Percentage Rate) on balance transfers.
- Submit a balance transfer request with details of the card you’re transferring from.
- Wait for approval and pay any one-time balance transfer fee (typically 3%–5% of the transferred amount).
- Repay your dues within the promotional period (usually 6–18 months) to avoid high interest once the intro rate ends.
Pros & Cons of Balance Transfer
Pros of Balance Transfers
- Save on interest by transferring debt to a credit card that offers a 0% introductory APR.
- Simplify repayments by consolidating multiple credit card dues into one.
- Lower credit utilization ratio (if your new card has a higher credit limit and you don’t max it out).
- Avoid late fees and penalty interest on your current high-interest cards.
Cons of Balance Transfers
- 0% APR is temporary and usually only lasts for 6 to 18 months.
- Transfer fees apply, typically between 3% to 5% of the transferred amount.
- A new card’s credit limit may be insufficient to cover your entire outstanding balance.
- A high credit score is required; most banks prefer a score of 700 or higher to approve balance transfer cards.
When Should You Consider Transferring Your Credit Card Balance?
You should consider a balance transfer when the outstanding balance is very high, and it seems impossible for you to repay the full amount on time. A balance transfer may seem advantageous during a financial crisis, but paying your full outstanding balance each month is always the best option.
Additionally, make sure to calculate that the fee you have to pay for the balance transfer does not exceed the interest you would pay on the current card.
For example, if you transfer ₹50,000, you’ll be charged ₹1,500 (3% of ₹50,000) for the balance transfer. You should only continue if the interest on your current card is more than ₹1,500 over the same repayment period.
Also, note:
- There’s often a cap on how much you can transfer, usually 60–70% of your new card’s credit limit.
- The 0% APR starts from the date the card is issued, not from your transfer date.
Bottom Line
While balance transfer is a valuable service offered by banks, it’s important to consider several factors before opting for it. It can benefit some individuals but may not be suitable for others, depending on their financial situation. Nonetheless, selecting a balance transfer to combine your payments can be a smart move, especially if your new credit card offers a 0% APR promotion.
What do you think about a balance transfer? Make sure to share your views in the comment section below.