A credit card is a convenient financial tool to make instant purchases and pay for them later. However, there will be times when in some situations, repayment becomes difficult. In such circumstances, a balance transfer can be considered as an easy option to manage your credit card debt. But before you decide to opt for the same, let us understand what it means and should you or should you not go for a balance transfer.
What Is a Credit Card Balance Transfer?
Balance Transfer refers to the process of transferring the outstanding dues from one credit card to another. There are many credit cards available that offer 0% interest on balance transfer over several years. These cards help you to save a huge amount of money if you pay the whole sum during the interest-free period only. The credit card balance transfer process is prompt and can be completed in a short span of time.
How Does A Credit Card Balance Transfer Work?
It isn’t a get-out-of-debt free card, it typically comes with fees and you are likely to pay interest on whatever balance you transfer. It is a facility that allows you to transfer the outstanding balance from a high-interest credit card to the one with a lower interest rate and repay it in easy monthly instalments.
|Lower Interest Rates: Banks and financial institutions which issue credit cards for balance transfer levy comparatively lower interest charges||Might Hurt Credit Score: If you apply for a balance transfer frequently or have a credit card balance above 30% of the credit limit, then your credit score might go down|
|Convenience: Transferring multiple cards’ balance into one card is a lot easier. Tracking one credit card payment every month makes it less likely to miss any payment.||Expensive: Majority of the bank charge processing fee for initiating balance transfer|
|Additional Buffer Time: Many banks give a buffer time to credit cardholders to pay off their debt after the credit card balance transfer with zero or nominal interest rate||Increased Risk of Debt: When you opt for a credit card balance transfer, you may end up with a credit card with a higher credit limit, hence more credit card debt|
Should You Transfer Your Balance?
Getting a card with a zero-interest introductory rate can save a lot of money and help you pay off your balance sooner. As long as you are not seen as a risky borrower to the creditors, a balance transfer can be a decent option for you. Here are some signs that balance transfer might be an ideal option for you-
- You have a better paying job and you are ready to pay off your debt
- You have created a planned budget and have committed to stop overspending
- Your credit rating is decent enough to qualify for a new credit card
Things to know before switching to a new credit card
Even though credit card balance transfer is a better option to pay off credit card debts, it is advisable to consider certain things before moving ahead with the decision.
Compare the balance transfer credit cards– The initial and the most important thing to do is to compare the different cards and find the most suitable one for you. If you want to go for the best deal on credit card balance transfer, look for the following benefits in your new card:
- There are cards which allow you to pay your outstanding balance with 0% interest rate or with a very low APR as compared to others. Look for the cards with good introductory rates.
- Keep in view the time period of the introductory rate. Usually, it is 6 months but there are cards on which the introductory rate lasts for a year or more.
- Check if the introductory rate is applied to new purchases as well along with the transferred amount.
Read the fine print– Credit card issuers can make money from you in numerous ways. The interest rate isn’t the only thing you need to look at. You may also be charged with a high annual fee. You should look for a card with reasonable fees. Credit card companies also charge penalties for paying your bill late. In addition, you may have to make a minimum monthly payment on the card. The other important thing to consider is the credit card balance transfer processing fee which is usually a percentage of the amount being transferred.
Transferring and repayment aren’t same – It’s an assumption that by opting for a balance transfer you have completely paid off their debts. But in reality, you’re just transferring your previous balance to the new card to save money from a hefty interest to be paid. It is also advisable to make a repayment plan so that you do not miss out on any payment.
Careful with the new purchases– No doubt credit card balance transfer is the best way to tackle the multiple credit card debts but it is beneficial only when you control your new purchases. Many of the cards offer rewards with the new purchases which generally entice the cardholder to purchase more. And the new purchases come with interest charges that will offset your savings from a balance transfer.
Look at your credit rating–
Most banks take your credit rating into consideration before giving you the privilege of a balance transfer. To become the most ideal candidate for a balance transfer you need to have a good credit score of 750 or above. With a credit rating below 750, it’s harder to qualify for a good deal.
How To Apply For Credit Card Balance Transfer?
Once you have chosen the right balance transfer card, you can apply for the same.
- For the majority of the banks, you can apply for the same online
- Once you have filled the required information, submit the application and wait
- You will receive the confirmation in case you get approved for the same
- Contact the new credit card company for the balance transfer process. You can do so over the phone or online
- You will be required to provide your new credit card company with the account number of your old card and tell them how much of your balance you want to transfer
- After your balance transfer is approved, your transferred balance will be displayed on the new card
Here are some of the ways balance transfer can affect your credit rating
- Repayment history– Failing to repay the minimum amount due before the promotional period ends will increase the level of debt. It will definitely impact your credit score.
- Status of application– Credit card issuers maintains a keen view in your credit card application before approving it. Rejection of your credit card application can have a negative effect on your overall credit score since the new application is 10% of your credit score. So it’s important to check the application properly.
- Multiple cards and transfers– Applying for multiple credit card applications in a short span of time can also hurt your credit score. Credit card issuers may come up with a view that the cardholder is repeatedly issuing new cards to get sign up bonus or it may also indicate that you won’t be able to afford the monthly payments of all the new credit cards. If you fail to repay your debt by the end of the promotional period and have to move the remaining amount to another balance transfer credit card, this will also look bad on your credit file.
It is always advisable to proceed with caution while accepting a balance transfer offer as there are few drawbacks to transfer your balance to a new credit card. But if the new card helps to simplify your finances and help you to pay off debt faster than the balance transfer option is worth it.