Credit card balance transfer
Very often banks charge a very high rate of interest in the credit card statements. This is an inevitable part of having a credit card. However, there are ways to avoid paying an exorbitant amount at the end of each month just because you went overboard the grace period of payment. The answer lies in the magic words Balance Transfer.
So, what is the concept behind Balance Transfers The idea is if your existing credit card charges a high rate of interest, you could transfer the current outstanding amount from your credit card to another credit card which charges a lesser rate of interest. However while this might seem like an attractive proposition there are several things you need to be careful about. Typically the standard interest rate is 2.95%. Cards that offer Balance Transfer offer an interest rate ranging from 0.99% to 1.75%. Balance Transfer is a way of fetching new business for the bank. Hence usually banks will not allow Balance transfers to happen between credit cards offered by the same bank.
There is one important thing to be noted the lower or preferential rate of interest offered in the Balance Transfer would be applicable only for six months. After that the bank would continue to charge the normal interest rate of 2.95%. To apply for a Balance Transfer, you need to fill out a Balance Transfer form giving details such as credit card number, amount to be transferred, and name of the bank that has issued the card, credit limit for the card and expiry date for the card. Other than this, you also have to give a photocopy of the card's front and back and the last bill statement.
Some banks offer certain promotional concessions for example, if you transfer a certain minimum amount, the annual charges on the card might be waived off. You could transfer balances from multiple cards however you need to be certain the card youre transferring to is offering a lower rate of interest.
Usually the maximum limit for transfer is 75% of the card limit but this varies depending on the card opted for. Certain banks offer Balance Transfer facility as a one-time facility while certain other banks offer this as a standard recurring feature.
For all Balance Transfers, there will be a Balance Transfer fee applicable. This would typically be around 3% of the amount transferred. You need to beware of Balance Transfer fees. The 0% balance Transfer promotional campaigns had flooded the credit card market some time back where they would not charge any balance transfer fees and sometimes this offer came along with a 0% APR scheme also which meant purchases made on the card would also not be charges. However, smart credit card holders saw an opportunity to use the loopholes in this system they would keep transferring their balances from one card to another within the promotional period and then rotate it again thereby saving interest rates while paying off the amount on their cards. Credit card companies soon saw through this and limited this practice in many different ways.
Many times you would find that inspite of having a lower Balance Transfer fee, the credit card companies will always recover their costs with many other charges and fees. However, one thing to be careful about is that if the amount is not transferred within the promotional period or stipulated time, then chances are you might end up paying a high amount of interest thereby paying more than what you were initially!!
There are several things to look out for for example, just because you have done a Balance Transfer, it does not at all mean your debt has gone away rather it is just rotating from one bank to another. So, one way or the other, you need to pay this off in time. Some of the good things to keep in mind while opting for a Balance Transfer are the length of the offer period. The amount of time your transferred balance is subject to the promotional rate. Another thing to be kept in mind is the interest rate being offered The 0% interest is charged on the transferred balance. On some cards you could transfer existing loans and overdrafts and still avail this promotional offer.
Now coming to the bad things about Balance Transfers. Needless to say there are several hidden costs. Some banks even charge a handling fee for the Balance Transfers. You need to check carefully how long the offer is valid. There is usually a cut off point from the account opening when the offer is no longer valid. Be very aware of this otherwise you could end up transferring a balance to a higher rate.
You should avoid making any new purchases on the card, unless it explicitly states a 0% rate on purchases. The objective of the Balance Transfer is to pay off your debts. If you make purchases on the new card, without having a 0% on them youre actually paying much more than what youd bargained for.
What happens when the promotional low interest period ends The bank starts charging the normal rate. So, most banks will hope the cardholder retains the card, since they can then start charging interest and earn some money. So, its best to get the lowest rate for the Balance Transfer. So, you need to allow a margin of 6-8 weeks before the offer period ends, to apply for a new card. That way, you can transfer the amount to the new card before the offer period ends and thus save the interest payment on it!
Some things you really need to take care of do not go shopping on your card, unless you know the APR is at 0%. Else youll end up paying more. You need to ensure you do not miss any payments Else you run the risk of securing a penalty. So beware of this. Check the interest rate applicable once the offer ends. This is crucial it would decide whether you need to transfer to a new card before the offer period ends or stick with the same card even after the offer period.
Balance Transfers can be a great way to save money, provided you have the facts in place and know what you're getting into.
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