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 minimize 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.

 

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 installments. 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 utilization ratio as you will have fewer cards to avail credit from. The credit utilization 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 utilization 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 utilization ratio, and adversely impact your credit score.

 

In a Nutshell

 

A balance transfer credit card can be a boon for people with a high credit utilization 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.

 

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. 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 Kotak. Kotak, 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.

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.