Does it feel like you’re drowning in credit card debt? Unsure if you will ever be freed of it all? Finding it difficult to pay your credit card bills on time, especially with the high-interest rates charged?
A great way to manage credit card debt is to opt for a credit card balance transfer. It’s the process of transferring debts from one credit card to another. Usually, balance transfers are used to lower credit card bill interest rates. There’s no doubt that credit card balance transfer is a handy option to make your credit card debts manageable. However, if you’re not careful, it can lead to a bigger debt than what you started with.
In this article, we walk you through the pros and cons of credit card balance transfer so that you can evaluate whether it’s the right strategy for you or not.
First things first,
What is a credit card balance transfer?
Credit card balance transfer is transferring outstanding credit card dues on credit card A to credit card B. Balance transfers help credit cardholders make use of the lower interest rates offered by the new credit card issuer.
For example, let’s say you have a balance of Rs. 50,000 on credit card A. The interest charged on this card is 15%. Now, you come across another offer where credit card B charges a lower interest of 12%. You can transfer the outstanding balance on credit card A to card B and enjoy the lower interest rates.
Generally, credit card transfers are offered by credit card companies to acquire new clients. The new card issuer’s rate of interest is lower than the interest charged by the former card company.
When is credit card balance transfer a GOOD idea?
Let’s take a look at the pros of opting for a balance transfer:
- Move your outstanding balance to a credit card with a lower interest rate
This is the main reason why borrowers opt for a credit card balance transfer. You can enjoy lower interest rates on your credit card bills, especially when you use promotional offers. Since the interest rate charged by your new credit card issuer is lower, most of your monthly payments go to reducing the balance instead of for the interest payments. This is a great way to significantly reduce outstanding credit card debts.
- Switch to a credit card with better terms
Suppose your current credit card doesn’t have many features or offers you poor terms like a short interest-free period, higher interest rates, and a weak rewards program. In that case, you can switch your balance to a new provider to enjoy better terms.
- Consolidate credit card debt
If you’re finding it difficult to track multiple credit cards with numerous outstanding payments, then you can transfer your credit card balances for easier debt consolidation. Let’s say you have Rs. 40,000 outstanding on credit card A, Rs. 25,000 on credit card B and Rs. 10,000 on credit card C, then you can transfer the balance on cards A and B to C. This way, you have to pay only one bill making it easier for you to handle and manage all your debts.
Now, let’s take a look at:
When is credit card balance transfer NOT a good idea?
- You may be charged a higher/same interest rate
Most card issuers offer low-interest rates on balance transfers only for a specific period. After the end of the promotion, the interest rates are likely to be hiked. Ensure you read the terms and conditions of the balance transfer to see if it offers you significant savings before switching from one card issuer to another.
Also, to qualify for the new card issuer’s lower interest rates, you need to have a good credit score. If your credit scores are low, you may be charged the same or even higher interest rates.
- Balance transfer includes fees and charges
Most credit card companies charge a balance transfer fee to switch your balance from your old credit card to the new one. Besides this fee, there may be other charges like joining fee, annual renewal fees, etc., on the new card. So, make sure to evaluate all the fees and decide whether the savings are worth it.
- You risk hurting your credit score
When you switch your balance from an old credit card to a new one, it may impact your credit score. Applying for a new credit card involves a hard inquiry on your credit report, which may pull down your score. Additionally, by moving your outstanding balance to another card, you increase the new card’s credit utilisation ratio. Whenever the utilisation ratio goes above 30%, it impacts your credit score negatively.
The good news is that the credit score hit is only temporary. You can recover the lost points by making timely and full payments on the new credit card bills each month.
- You may be tempted to spend more, thereby increasing your debts
When you switch to a new credit card with a higher credit limit, it means you have more credit available every month. This may tempt you to spend more, causing you to end up with more debts than you started with.
So, you have to be extremely disciplined and follow the golden rules of credit card usage on your new card.
- Pay credit card bills on time and in full.
- Avoid going beyond 30% of your credit utilisation ratio.
- Avoid unnecessary expenses and stay disciplined.
Overview of Pros and Cons of Credit Card Balance Transfer
|Credit Card Balance Transfer|
|What we like||What we don’t like|
|You can enjoy a lower interest rate on your credit card. Move your existing credit card balance to another card with better terms and interest rates. Helps in consolidating credit card debts.||A credit card balance transfer fee is included. The new credit card company may offer lower interest rates only for a specific period, after which interest rates are hiked. You risk adding more credit card debt. Your credit scores may be impacted.|
Points to Keep in Mind before Opting for a Balance Transfer
A credit card balance transfer may be a handy tool if you’re looking to consolidate your credit card debts and pay them off faster. It can help you get free from your credit card debts, especially when the new credit card issuer offers you lower interest rates.
However, while a balance transfer can help you manage your debts, it doesn’t make your debts vanish by magic. The only change is that you transfer it to a new card issuer at lower interest rates. You still have to pay the old debts. Also, credit card balance transfer has a balance transfer fee. Do the math to see whether the savings incurred by transferring your balance outweigh the charges involved.
Finally, it pays to address the core issue of why you racked up credit card debts in the first place. Understanding your spending patterns, cutting down expenses, and tightening your purse strings are the best ways to go debt-free.
Credit card balance transfer has both advantages and drawbacks. It may be your best option to manage and reduce your credit card debts. Ultimately, a credit card balance transfer is worth it if it helps you pay off your credit card balances faster and get back on track regarding credit card debts. However, you need to consider all the factors involved, like terms of interest, balance transfer fees, etc. Weigh the pros and cons of credit card balance transfers carefully to decide if it’s the right choice for your financial situation.