Mr. Kapoor is a middle level manager working with a leading private company. He has three credit cards – A, B and C, which he has been using judiciously over the past several years. Recently, he decided that he wanted to get new furnishings for his house and he put all of those expenses on credit cards A and B. Now he finds that unlike previous instances, he is unable to pay the bills off completely within the due date. As he did not want to pay a high interest on cards A and B, he started looking for options that would enable him to consolidate the debt and pay it off a little bit at a time without paying a high rate of interest. He found that he could either convert the expenses into EMIs separately for each card or transfer the balance from cards A and B to card C.
Mr. Kapoor’s situation is quite common and in the recent push towards use of plastic, EMI conversions and balance transfer offers at reduced interest rates are offered by almost every card provider to rope in new customers. Though EMI conversions on existing debt are very convenient and the process is completed within hours, this option does not help you consolidate your debt. In the following sections we will discuss some of the key points about balance transfer offers.
Transferring Your Balance is not a Type of Repayment
In Mr. Kapoor’s case, if he transfers the balances from cards A and B to card C, he will no longer owe on cards A and B, but he will have to pay the total due amount to the issuer of card C. The key help that a debt transfer provides is that you get more time to pay off your debt and during that time you benefit from the lower interest rate being offered. Keep in mind that you are still on the hook for the original due amount plus applicable interest so good spending habits are essential to avoid falling into a debt trap and benefit from the balance transfer offer.
How do you save through a Balance Transfer?
Continuing with Mr. Kapoor’s case, suppose his total balance owing on cards A and B is 80,000 and for the sake of simplicity let’s assume each of those has a monthly interest rate of 2%. By the end of the next billing period, Mr. Kapoor will owe an extra Rs 1,600 as interest. Now if the special interest rate on balance transfers offered by Card C is 1%, Mr. Kapoor will save at least Rs. 800 for the first month itself. Because credit cards work on a concept of monthly revolving credit, the due amount is compounded every month so using an EMI calculator can help you understand your repayment requirement much better.
Additional Points to Consider
You should note that the low interest rate offer on balance transfers only lasts for a limited period, hence, pay close attention to how long you will benefit from the lower interest rate. At the end of that period, the actual monthly interest rate will be charged on all remaining dues, so, it is best to opt for a balance transfer offer if you are sure to pay back the due amount before the interest rate period ends. Otherwise, you will only get limited benefits from the offer.
In Mr. Kapoor’s case, the balance transfer benefit would decrease further if there is a fee associated with the process. If the rate is 0.5% on the balance transfer amount (Rs. 80,000 in the example), he saves only Rs. 400. But as this is a one-time transfer fee, if Mr. Kapoor’s low interest period is two months or more, he will still save money by transferring his balance. The above example is for illustration only actual rates will vary from credit card to credit card.
There is no effect of a balance transfer on your credit score however a high revolving debt on card produces an adverse effect on your score. This is because the percentage of debt to total credit available is a major component in calculating your credit score and the transferred balance causes a major increase in the percentage of debt verses available credit.
Therefore, before going for a balance transfer ensure that you have a proper plan to ensure full payment as soon as possible. Having good credit habits will also go a long way towards helping you resolve this financial situation faster. In case you want to know your current credit score and find helpful tips regarding how to maintain a good credit score, log on to the Paisabazaar website.