Wednesday, 10 August 2016

Why Should I Opt For A Balance Transfer?

Opting for a balance transfer is a viable option when any or all of your debts including credit card balance, medical bill, loan(s) EMI suddenly roll out to unmanageable financial mayhem that you find yourself struggling to pay back the whole, but interest rates.

To understand the situation, let’s discuss situation of Tanmay Gulati, who is an IT professional with a decent credit score. He owned a couple of credit cards with Rs 50,000 limit on each. His monthly credit card expenses generally included Rs 20,000 as EMI for auto loan and Rs 10,000 credit expenses amounting to total of just Rs 30,000 on both the cards. So he maintained decent credit utilisation and successfully sailed through his credit score to 750 points, until the last festival season when his credit expenses reached to whooping Rs 85,000 instead of Rs 10,000. His monthly outstanding reached to Rs 1,05,000.

To fix this situation seemed far from a reality to him when he saw that despite paying back Rs 60,000 in last two months his credit balance still staggered at 85,000. Herein, his friend Sanjay Mathur advised him to make use of balance transfer credit card. By transferring his major credit balance to a new low interest credit card Tanmay could get rid of this adverse financial crunch with in next few months. He saved his score from crippling down further.

It is very important to manage your loan balance and outstanding debts on time before the debt balloon bursts your entire credit history. Balance transfer is one tool that you can use at least for short time to manage your financial troubles. Let’s discuss in detail about balance transfer credit cards below.

What is a balance transfer credit card?

Many banks offer low or zero interest balance transfer credit cards to attract new customers and retain the old ones. Basically ‘balance transfer’ feature allows you to transfer balance from your old credit card to a new credit card, primarily to save interest on the balance amount. However a bank may charge nominal processing fee up to 3 % on the transfer. Usually one can transfer balance up to 75 % of the one account.

Why should I opt for balance transfer? What are the benefits?

1.      Convenience
Balance transfer helps you overlook multiple accounts or cards at one place. So it adds to your convenience. It is easier to monitor your transaction at one place.

2.      Saving
As you get to save on interest, you pay back your debts faster with balance transfer.

3.      Impact on CIR
By using balance transfer you save your score. Long outstanding balance on your cards can potentially harm your credit history and free credit score. But balance transfer enables you to pay out and clear the history.

4.      Multiple options to choose
You can find many options in the market. As balance transfer credit card is not a standard product on offer, you may require to search for the right offer. But you are not restricted to get a new card from your existing bank only. Usually banks offer initial waiver on interest rate and processing fees to attract new customers. You can use the benefit to cap your current imbalance and close the card later on.

What precautions I need to take while transferring balance?

1.      Never close your old credit card when you opt for new card to transfer the balance. As closing the card will reduce the total limit and increase your credit utilisation. Crossing the credit limit and over utilization of credit, both the factors would affect your credit score very badly. Plus the age of your card also helps in building score. Thus your old card should be retained.

2.      Always factor in transfer fees which is not more than 3 per cent. Also many banks would not allow you transfer more than 75 % of your dues. So it is very important to calculate the real advantage and access your repaying capabilities before applying for new credit card. You need to close this whole thing in short time. This should not start another chapter of unsettled debts to your account.

3.      Once you fill the form for balance transfer it might take 7-10 working days to complete the transaction. Herein you need to watch out to not miss the due date in between. It is thus very important to keep paying your minimum dues in this period as well. You do not want to not add a red flag to your credit report in the meantime.

Hope this article helps you know when to use balance transfer and save your credit score.

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