Credit card balance transfer is the process of transfer of outstanding amount that is due, from one credit card to another. Banks have been offering this option of credit transfer from another card at a lower interest rate to attract more customers. Nonetheless there are a lot of underlying factors to be looked at before considering this option. The low interest rate on remaining balance applies only for a limited period and there are various other clauses and conditions to be considered while going for this option, as discussed below.
If the current interest rate is much higher than the interest rate offered by the Bank to which you are considering to make a balance transfer to, then it is a wise option. If credit card balance transfer ensures a good rate of savings in terms of interest paid as well as taking into consideration other fees and charges such as processing fees and so on, it is a advantageous move. If the overall balance, once transferred, is being paid offer in the specified promotion period during which a low interest rate applies, it is a very rewarding option. But many people tend to be unable to manage their credit card purchases and thus end up having more debt. In turn they wouldn’t be able to pay off their outstanding in time. Most credit card companies consider this factor while offering the balance transfer option with low interests for a limited period after which higher interest rates are chargeable.
Customers should be careful not to buy new products and services using this new credit card since, only the amount which is transferred is liable to this deducted interest rate. New purchases do not have an interest free period. Infact, interest is charged from the first day of purchase. In order to benefit from the balance transfer to a new credit card, the customer has to keep in mind that they have to first finish off payment of the existing debt. Another factor to be considered is the processing fees. A one time processing fee is charged during the time of balance transfer , and if you are not careful with the amount charged this might reduce the benefits you aim to achieve through the process. Also while calculating interest charges, service tax that is applicable on interest charges have to be accounted for. High rate of interest on the credit card also means high service tax payable.
Carrying a large revolving debt has a negative impact on the overall credit score. The percentage of total debt to the total credit is considered while calculating credit score. Transferring balance to another credit card and adding on credit and again transferring it repeatedly is not a good option since it reflects badly on your credit score.
Balance transfer is a good option if it is managed carefully. It enables the customer to save on the interest paid out as well as helps to pay off the outstanding amount more quickly. But if the process is not handled with care, the customers might fall into a debt trap. Balance transfer should be made solely with the purpose of paying off debt and not for adding on to it in the meantime and care has to be taken of stretching expenses beyond income limit.
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