Consolidating Your Credit Card Debt Can Be Very Adventageous
Transferring the balance on one card to another can work for you or against you, depending on how well you do your math. The math is actually very simple (as we’ll see shortly), so there’s no reason why you should end up at the wrong end of a balance transfer.
Here are some important facts to take into account when planning a balance transfer.
Wait, what is a balance transfer?
A balance transfer, simply put, is the transferring of dues on one card to another, which could be an existing or a new credit card. For example, you transfer the balance on card A to card B, because the latter offers certain advantages.
What are the advantages?
There are three main advantages:
- You are able to pay debt more quickly
This is especially true when you take up a new card and transfer the balance of an old card to it. To lure customers to use their cards, banks frequently offer a zero interest period for a limited period, usually up to 90 days, in case of a balance transfer. The ‘interest-free’ period serves as an incentive to the customer to clear the balance.
A limited zero interest period, however, is not the only scheme banks use to convince users of other institutions to use their products instead. There are several different schemes (will take a look at the most frequently used ones in a while), but each works on the same principle: offer the customer an incentive to make it attractive for him to dump the existing provider.
If you hold multiple credit cards, you can transfer the debt to a card which has a lower interest rate. Of course, you won’t get attractive schemes which new provider might offer; nevertheless, the rate of interest would be less and it might allow you to clear the debt quickly.
- You save money
That is the primary reason why customers transfer a balance on one card onto another.
- Makes it easier to track payments
Remembering due dates of several cards can prove a hassle and might result in a late payment every now and then. When you consolidate debt, you only have to manage one card—meaning less headache.
Common schemes banks offer in case of balance transfer
We’ve already seen one: the limited zero interest period scheme. Another one is to offer a very low rate, like 0.5% to 0.9%, for 6 months. Some banks may even offer a low interest rate for a considerably longer period, like 12 months or even 24 months.
You want to transfer balance, but no new provider has approached you with an attractive scheme. What to do then?
Suppose you hold credit cards from two providers, A and B. The first provider charges 3.5% rate of interest and the second one 2.6%. If you wish, you can transfer the balance on A to B. Most banks allow balance transfer, even though they might not mention it explicitly.
What are the pitfalls?
Two things can possibly go wrong, resulting in more spending than you originally had bargained for.
- Selecting an inappropriate scheme
You’ve a substantial outstanding on a card and are pretty happy that another issuer is offering you a zero interest period of 90 days. However, did you consider your repayment capacity? What if right now you are not in the position to clear the full balance in such a short period?
Then you may not benefit as much as you initially thought or, worse, may end up paying just as much as you’d have paid earlier or even more, depending on how new card’s interest rate compares to previous card’s.
- Being shortsighted
In addition to the rate of interest offered during the limited period, you must compare the regular interest rate, credit balance, interest-free period, and reward programs to see if the trade-off makes sense. Apart from this, also take into account the processing fee. If the card has a limited ‘interest free’ period but also a 3% processing fee, the offer may not be so advantageous.
So what’s the ‘secret’ formula to know if the trade-off will be a good one?
The ‘secret’ formula actually is a straightforward one: ascertain the immediate benefits and the long-term effects of transferring the balance to a new card.