Skip to main content

Credit Card Balance Transfer

 

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.

 

Popular posts from this blog

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Birla Sun Life Mutual Fund Launches Birla Sun Life NIFTY ETF

Birla Sun Life has launched a new fund namely, Birla Sun Life Nifty ETF, an open ended exchange traded fund. The new fund will be open for subscription from 4th July to 18th July 2011, at an offer price of Rs 10 per unit. The investment objective of the scheme is to generate returns that closely correspond to the total returns of securities as represented by S&P CNX Nifty, subject to tracking errors. No exit load will be charged under the scheme. The performance of the scheme will be benchmarked against S&P CNX Nifty and will be managed by Satyabrata Mohanty.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   1) DSP BlackRock Mutual Funds: http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html   2) Reliance Mutual Funds: http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html   3) Birla Sunlife Mutual Funds: http://prajnacapital.blogspot.com/2011/...

Mutual Fund Reivew: Birla Sun Life Asset Allocation Conservative

Birla Sun Life Asset Allocation Conservative has numbers on its side to prove its credibility… Don't be surprised to find this Fund of Funds ( FoF ) in our recommendations. It has earned its place. And despite the difference in the structure of the product, there is no arguing with the numbers.   Of the total 6 years of its existence, the fund has been among the top 10 funds in its category in four of them. Last year it put up an average show and the only year it underperformed its peers was in 2008.   One aspect to look at when investing in an FoF is the expense ratio. The expense ratio of an FoF is capped at a lower limit of 0.75 per cent (2.50% for an actively managed fund). However, the FoF not only has its own expense (though lower) but even the expense ratio of the fund it is investing into. Fortunately, the fund manager takes that into account. "Expense is one of the important criteria used for fund selection and is the main reason for our investment in BSL Ind...

Short-Term Investment Options in Mutual Funds

Mutual funds offer liquid funds and ultra short term funds in the debt category, which are suitable for short investment periods. Ultra short-term funds were earlier known as liquid plus funds. Liquid funds invest in money market instruments with a maturity of 91 days or less. However, there are no such restrictions for ultra short-term funds. Who should invest in these? These are open-ended schemes. Investors with a short investment horizon or with surplus cash and low risk appetite should look at these. These could include corporate as well as retail investors. Those interested in staying invested for less than 15 days can opt for liquid funds. Retail investors who want to remain invested for two-four months, can look at ultra short-term funds. The short duration for both liquid and ultra short-term funds shields them from any interest rate volatility.   What kind of returns do they offer? In terms of an investment period less than 15 days, these funds are comparable to a ba...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now