31 MAY, 2022

Credit cards are an excellent tool for managing emergency expenses without seeking external financial aid. However, if the user is not careful, the expenses can mount making it impossible to repay the borrowed amount in due time. Inability to repay the outstanding balance by the due date will attract higher interest charges and negatively impact the credit score. Moreover, it can impact your ability to get a higher credit amount in the future. However, there is a smart way to avoid this.

Read on to learn more about the balance transfer credit card and effective tips to use it wisely.

What is a Balance Transfer Credit Card?

Balance transfer refers to the process of transferring the outstanding due amount. A balance transfer credit card is a type of credit card which allows users to transfer outstanding balances from other credit card accounts. It is possible to transfer the amount from one credit card account to another account at a different credit company. The best balance transfer credit card charges zero interest rate on the outstanding amount during the initial period. The primary objective of transferring an unpaid balance is to minimise the interest expenses associated with the due amount. Usually, credit cards have a higher interest rate. So, if you have spent more than what is possible to repay, it can significantly add to your financial burdens.

How Does Credit Card Balance Transfer work?

Credit cards for balance transfer can be a great way to save money on high-interest credit card debt. By transferring your balance to a new credit card with a lower interest rate, you can reduce the amount of interest you pay each month, allowing you to pay off your debt more quickly.

Credit cards for balance transfers involve the following steps:

Step 1. Apply for a new card - A credit card with 0% APR is always preferential for balance transfer. So find a credit card issuer with a longer interest-free period, preferably 90 days to manage your other card balances.

Step 2. Start with the transfer process - Credit cards for balance transfers are available online. So provide information about the due balance, issuer name and the account information to get started.

Step 3. Wait for Approval - Once the issuer approves balance transfer, the outstanding balance of your old account gets paid directly. Do confirm the approval time as it could take two weeks or longer, depending on the issuer.

Tips To Effectively Use Balance Transfer Credit Cards

A balance transfer credit card can be a great asset when you know how to use it wisely. Here are some practical tips for using balance transfer credit cards.

1. Planning is pivotal

Ensure that you have a repayment plan in place before you opt for a balance transfer credit card. The plan should clarify how to settle your dues and avoid high-interest charges. Commit to paying a particular debt amount within a given period. It is crucial to create a monthly budget and stick to it. You must understand that you will have to pay a minimum amount each month, even with balance transfer credit cards. Planning plays a crucial role in keeping finances in order and ensuring that you don’t slip into a debt spiral.

2. Decide the debt amount and EMIs

Decide two things before choosing a balance transfer credit card, i.e., the debt amount you will be transferring and the EMIs. It is possible to move a partial or complete debt amount to another credit card. You need to factor in your repayment capacity, income, etc. It will help decide the credit line for a balance transfer credit card. Another thing that you need to contemplate is the EMI as many banks offer EMI facilities  for a balance transfer. Deciding the total duration of EMIs is vital to repay the loan amount effectively.

3. Review & compare different balance transfer cards

It is important to review the features and benefits of different balance transfer cards to understand the pros and cons. Compare different balance transfer cards before applying for one. Many balance transfer credit cards charge zero interest rates from users on the balance transfer amount. Don’t blindly opt for a balance transfer credit card with zero interest rate. Learn about the associated processes as it could significantly add to your costs. For instance, knowing the balance transfer charge or processing fee is vital to making the right decisions.

4. Understand the terms and conditions carefully

The terms and conditions associated with a credit card play a crucial role in how beneficial the new credit card will be for you. You must spend some time learning about the terms and conditions of your new card. These terms can vary greatly, depending on your card issuer’s policies. You should know what your APR is for new purchases and balance transfers. A zero percent APR on balance transfer doesn’t mean that it will be the same for new purchases. If the APR on new purchases is high, refrain from using this card to buy goods and services.

5. Transfer the balance amount timely

A repayment plan is highly recommended to avoid any mess. Most credit cards promoting the balance transfer feature with zero percent interest rate offer this benefit only for the initial period. You need to transfer the balance within a short period after opening a new account to reap the full benefits. Ideally, you should transfer the balance amount within 30 to 90 days of opening your account.

6. Automate your payments

After you have transferred the balance, set up automatic monthly payments to repay your debt in due time. It is recommended to pay a majority of the pending amount before the zero-interest rate period is over. Automating your payments will ensure that you never fail on monthly instalments. It requires factoring in the monthly income and creating a strict budget for things. Automating these payments also eliminates the need for manual intervention every time the due date arrives. You won’t have to worry about missing any due dates.

7. Don’t close old credit cards after a balance transfer

One of the most common mistakes that people commit is closing their old credit cards after they have transferred the balance. Closing an old credit card can hamper your credit score and history. It will also increase your credit utilisation ratio as you will have fewer cards to avail credit from. The credit utilisation ratio refers to the revolving credit that one uses divided by the total credit limit available. For example, if you use 30,000 of your 1,00,000 credit limit available, the credit utilisation ratio will be 30%. So, it is best to avoid closing old cards because it will increase your reliance on the new credit card, increase the utilisation ratio, and adversely impact your credit score.

Benefits of Credit Card Balance Transfer

Credit card debt can be a source of financial stress for many people. If you have high-interest credit card debt, you may feel like you're stuck in a never-ending cycle of making minimum payments and struggling to make ends meet. However, there is a solution that can help you manage your debt more effectively: a credit card for balance transfer.

Let’s see what is a balance transfer credit card benefit includes -

  1. Savings prospects - No need to pay the incurred interest when you transfer card outstanding balance.
  2. Convenience - One of the convenient options for managing huge debt as you can do it online without going anywhere.
  3. Improve credit - Credit score reduces when there is a huge debt reflecting in your report. Credit card balance transfer removes the interest aspect making repayment easier and improving credit score.

In a Nutshell

A balance transfer credit card can be a boon for people with a high credit utilisation ratio. It allows you to reduce the interest charges on the outstanding debt and save money. The above given  tips will help you effectively use a balance transfer credit card.

“What is a balance transfer credit card?” is easy to understand and proceed with if you know the steps. And the balance transfer facility can be a useful option for those looking to consolidate their debt. It's important to compare the offers as there is a fee involved. So keep the tips in mind and maximise the benefits. You can move your existing credit card balances to a new card with a lower interest rate, potentially saving you money on interest charges and helping you pay off your debt more quickly.

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Frequently Asked Questions

Should I apply for a balance transfer credit card?

You may proceed with the balance transfer option if you see possible savings out of it. Paying high-interest debt doesn’t make sense when you can qualify for a new card with a 0% APR. This way, you can consolidate your debt and pay them off without any hassle. Many balance transfer credit cards offer a 0% or low interest rate on balance transfers for an introductory period, which can allow you to save money on interest charges while you pay down your debt.

How many times can I transfer my credit card balance?

No limitations are there on credit card balance transfer, but ensure the existing debt doesn’t exceed your credit limit. So do balance transfer wisely taking care of all factors, such as new credit card limit, used and unused balance, and existing debt. There may also be a maximum amount for balance transfers, regardless of your available credit limit. So, it's important to carefully review the terms and conditions to understand the balance transfer limit and any associated fees.

How can we choose the best balance transfer credit card?

A credit card with an introductory 0% APR is considered best for balance transfer as it helps you avoid paying additional charges on your outstanding balance. 0% APR is valid for a limited time only, for instance up to 90 days. The best balance transfer credit card for you will depend on your specific financial situation and goals. Compare different credit cards to find the one that best meets your needs.

Will credit card balance transfer affect my credit score?

A balance transfer helps you transfer your unpaid credit card bills to a new card. And when you transfer a balance, your credit score will likely improve as you will pay them off without interest. The 0% APR of your new card will help you reduce the interest burden of your existing credit card debt. However, whether it has a positive or negative effect depends on how you manage the transfer and your existing debt.

Is it hard to get a balance transfer credit card?

Balance transfer credit cards are easy to get if you have a good credit score and an existing relationship with the card issuer. All these help you qualify for a new credit card with which you can manage your unpaid credit card bills. While it may not be necessarily hard to get a balance transfer credit card, it's important to consider your individual financial situation and do your research before applying.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.