“All that glitters is not gold”
Sometimes all that you want is to get rid or rejig your debt. At such a time a balance transfer option on your credit card seems inviting and you are tempted to grab it. But wait, do your homework before you jump at it. Undoubtedly paying off your debts at a lower cost (which is generally the reason why people opt for balance transfer) is the most important factor financially and also helps in rebuilding your credit score. One would certainly find a balance transfer easy to manage, less burdening and helpful in meeting one’s goal. Let us closely examine varying aspects of a BT.
What is a balance transfer?
A balance transfer is an opportunity to transfer outstanding debts that you may have collected on different credit cards, onto one card. This is one way to consolidate your existing debts. For those who are struggling to manage payments on their cards and other credit facilities this may seem godsend. Through a balance transfer an individual can pay off outstanding balances of other credit cards and other debts using a low interest credit card. So you have not only merged all your balances into one larger balance but can also enjoy a lower rate on this balance.
While up till now everything about a BT looks hunky dory, we must give inspect the underlying conditions fairly.
The (Not So) Enticing BT Offer
- Let’s talk fairly and squarely. Ironical as it may sound, but mostly individuals who have an impeccable credit record, qualify for BT offers. Especially for 0% balance transfer offers and even low rates. These offers are at the behest of the credit card company and consumers cannot avail it by simply asking for it. To judge your qualification for a BT, the credit card company does track your credit history. After all, the credit card company offering a BT also needs to mitigate its risks.
The low rate on a balance transfer credit card is only for an initial promotional period such as 3 months or 6 months. If you are able to clear your dues within this timeframe, then it’s great. You may save on account of low interest rate. However, if not then beyond the expiry of the promotional period the outstanding balance carries a higher APR which could be in the range of 18% to 25%, sometimes even more than what you were paying before the switch.
Superficially, a BT card appears very promising. You may feel that shifting to a lower rate of interest is your best bet to save on your money. We admit that spending money on paying high interest doesn’t make sense to borrowers. However, the switch to a lower rate card does not come for free. Usually a percentage of the balance or an upfront amount is charged to the borrower as processing fee. Most individuals, while calculating the savings after the BT forget to factor in the cost of this fee. When the fee is used to calculate the savings then one realises that the switch actually brought in a marginal relief.
- If you have vowed to get debt out of your way then the first thing you must do is to bring a change in your spending pattern. Making even the smallest of change can go a long way and help you meet your goal. However, it has been observed it is easier to fall in a wider pool of debt with a BT. The reason is most people begin to feel richer with their marginal savings, owing to lower interest rate and due to this they start spending beyond their means. One must be careful when using the BT credit card for making fresh charges as the new expenses will attract the standard rate of interest and not the lower promotional rate.
Avoid frequent balance transfers as they can be detrimental to your credit health. The age of your debt matters quite a lot in the calculation of CIBIL score calculation . Closing old ones and transferring to new ones will cost you not only the processing fee but also a few points of your score.
The (Not So) Devilish BT
So is BT really a wolf in sheep’s skin? Well, not really. There is certainly a flip side.
- A balance transfer brings with it the ease of managing and remembering just one payment. For example, Manoj Kejriwal is always on top of his bills and is never late in making payments. While he could pay his debts without difficulty, a balance transfer brought him ease of payments. He made one larger payment once a month and felt more sorted.
For a lucky few, paying off the debt within the promotional period not only helps in becoming debt free within months, but also saves money for them, which interest payments would have otherwise eroded.
Not only credit card balance, a few credit card companies also accept other debts such as personal loan, car loan etc to be transferred on to a credit card, depending upon the credit limit on your card. You can ask the credit card company to send you a check which can be used to pay off other loans.
Unless you can foresee to pay off the debt on a balance transfer card within the promotional period, the offer may not be worth its mettle. Effective management of your finances are also going to effectively help in ways to improve credit score fast. Beware of frequent balance transfers no matter how alluring they sound. Never go into one without doing your math. And finally, do read the fine print atleast twice before you give it a thumbs up.