Understanding credit card balance transfer in India
Credit card balance transfer is a financial strategy used by many to manage credit card debt more effectively. It involves transferring the outstanding balance from one credit card to another, usually to take advantage of lower interest rates. This move can save money on interest and help pay down debt faster. However, it's crucial to understand the basics and potential pitfalls before proceeding.
Know the fees involved
Almost all credit cards that provide balance transfer facilities levy a fee for the transaction, usually ranging from 1% to 3% of the transfer amount. So, if you transfer a balance of ₹50,000 with a 2% fee, you'll have to pay ₹1,000. You must ensure that the savings from the reduced interest rate surpass these fees.
Check interest rates carefully
The whole point of a balance transfer is to save money on interest. Some cards offer promotional periods with 0% interest on transferred balances, which can range from six months to two years. After that, the standard rate kicks in. Make sure you know what both the promotional and post-promotional rates are before you commit.
Understand terms and conditions
Every credit card company has its own fine print for balance transfers, including limits on how much you can transfer and rules preventing transfers between cards from the same issuer. Make sure to read and understand these terms thoroughly. Why? This way, you won't be surprised by any unexpected limitations or rules that could affect your financial planning and the potential benefits of the balance transfer strategy.
Plan your repayment strategy
To make the most of a balance transfer, you should have a solid repayment plan in place before you transfer. Strive to pay off as much as you can during any low or zero-interest promotional period. Without a strategy, you may find yourself stuck paying high-interest rates once promotional periods conclude.
Monitor your credit score
Applying for new credit cards will lower your credit score because lenders perform hard inquiries when you submit an application. And, closing old accounts after transferring balances will also hurt you by increasing your credit utilization ratio—one of the most important factors in your score. Keep these points in mind when deciding if a balance transfer is the right move for you.
