While card companies may tempt you with offers to lighten your burden, do the math before saying yes
At the height of the global meltdown in 2008-09 and its aftermath, several banks and credit card issuers in India had gone slow on growing their credit card portfolio. The number of credit cards in circulation fell as banks turned cautious and cleaned up their portfolios. While this trend largely continues, of late, there seems to be a hint of activity in the market. Banks are still cautious about issuing credit cards and are still watching the market. But, there is some positive movement in the market lately. Some private sector banks have been trying to lure credit card customers of other institutions by actively promoting their credit card balance transfer schemes. If you are one of those who have received calls exhorting you to make the switch, you need to be aware of the following before actually jumping the boat:
WHAT ARE BALANCE TRANSFERS?
Balance transfers are used by banks to build balances on existing cards and also acquire new customers. But mainly, balance transfers are offered to existing customers as an incentive for them to consolidate the debts on other cards. For instance, if you hold cards from two issuers, A and B, you can look at transferring the outstanding on the latter's credit card to the formers, if it makes an offer. In India, however, as credit card penetration is low, balance transfer too is still at a nascent stage. It is prevalent in developed countries, where the penetration is high. Given the size of the 'uncarded' population in India, there is scope to acquire new customers and hence, this is a relatively smaller trend here. However, you could see the trend in metros like Mumbai, Delhi, Kolkata and Chennai, with customers maintaining 2-3 credit cards. Since the penetration is high in such big cities, some credit card issuers find it difficult to tap new customers or build balances and usage on existing cards. Additionally, there is significant scope to increase balances on existing cards by building usage as card spends are relatively low even amongst the carded population." Such offers come in various forms. Some credit card issuers could offer schemes with a zero-interest period during say the initial three months in case of a balance transfer. Or, you could have balance transfers entailing a six month repayment period at an interest rate of 0.5-0.99% per annum. Then, there could be even more long-term schemes where you can choose a tenure of 12-16 months, and even up to 24 months in some cases, for repayment at a lower interest rate.
ASSESS YOUR REQUIREMENT
The key appeal lies in the lower interest rate charged by the institution offering the scheme. Suppose, you are paying an interest of 2.95% per month on your existing credit card's balance outstanding. If you decide to transfer this amount to another bank under a scheme that doesn't levy any interest for, say, three months, your savings could be huge if you manage to clear the dues within this period. Also, if a customer has made a big purchase, he can repay the amount over a period of 90 days, without paying any interest. Balance transfer could be particularly helpful to holders of multiple credit cards who have run up huge bills. For them, it could act as a debt consolidation tool, in addition to helping reduce the overall interest payable by them. Secondly, it could also save the hassle of keeping track of the due dates of various credit cards payments. In fact, instead of approaching an entirely new card issuer, you can zero in on an existing card maintained by you whose interest rate and other benefits outscore those of other cards in your wallet. By effecting the transfer, you would be essentially converting your high cost debt into a low cost one. Most banks offer such transfer options, even if they are not publicised aggressively. Therefore, if you feel that the weight of your current interest burden is proving to be unbearable, you can make enquiries with other banks or credit card issuers.
STEER CLEAR OF THE PITFALLS
However, like in case of any other debt, you need to evaluate your re-payment capacity before exercising this option. More so in this case as credit card debt is the most expensive form of borrowing, with interest rates going up to even 39-45% per annum. "While availing of any credit, it is wise to take the decision mainly on the basis of your repayment capacity. You should know how much debt you can take on. Low interest rate should not be the sole criterion — you need to do your math to work out the net benefit you stand to derive out of the transfer. Apart from the interest rate offered during the limited period, you need to make a careful comparison of the regular interest rate, credit limit, interest-free credit period and reward programmes to see if the trade-off is worthwhile. This apart, keep a close eye on the processing fee — if the scheme offers an interest-free transfer period of 90 days, but levies processing charges of say 3%, the deal may not necessarily be attractive. Customers also need to find out if fresh purchases made during the initial months would be liable to interest charged or not. Typically, the entire process — from the time you submit the application for a transfer till the new card issuer hands over the demand draft for the amount of transfer to the existing bank — could range from 10 to 12 working days. If the due date for the existing card falls within this period and you happen to miss the same, your calculations could go awry.
TRY TO AVOID CREDIT CARD DEBT
It is very easy to land into a debt trap with credit cards, if you go over-board with spending. So, you should look at it only if you treat it as a one-time exercise to get rid of your dues. "Ideally, you should not have any outstanding balance on your credit card at all. It is best to clear your bills within the interest-free payment period (of 30-45 days). After all, even in case of a balance transfer, you will continue to pay a hefty interest once the limited period is over. Credit cards should be ideally used only as spending tools and solely for the convenience they offer. They should not be looked upon as borrowing avenues. Do note that one of the reasons why card issuers are keen on offering balance transfers is that a sizeable number of such customers fail to settle the dues within the interest-free period and end up paying huge interest later. I would strongly advise people against going for such transfers. Credit card debt is best avoided.
