Almost everybody uses credit cards these days with the banks shelling them out like anything. There are various ways in which people are able to save money in the short term. Credit card balance transfer is one such way. It helps to save money in the short term if the debt is paid off in the promotional low-interest-rate period.
What is balance transfer in terms of credit card?
A balance transfer is nothing but transferring the outstanding dues from one card to another. This is a way of refinancing and banks often give such offers to attract clients. The new bank offers a lower interest rate than what a user is paying on the existing card. It often sounds to be very tempting but the lower interest rate applies only for a limited period.
- Saving money: Saving money by doing a balance transfer depends largely on the current interest that you pay and the promotional interest rate offered. If the new bank offers a low rate of interest for a limited period and the outstanding balance can be paid off within this period then the person is able to save some money as interest charges. So it is always suggested to do proper research about the rates of various banks offering cards before deciding to transfer the balance.
- Being careful: It is great to transfer the balance to a new card with lower interest rates if the intention is to pay it off in the limited promotional period. In this case, it makes great sense to avail of balance transfer. However, a lot of people expect that balance transfer would lead to less repayment pressure but they can actually end up paying more debt than they started off with. The credit card companies are aware of the lack of discipline to pay off debts in time and hence offer attractive promotional interest rates knowing that very few people would actually be able to pay it off. Once the period is over they start charging high rates and eventually a person has to end up paying more.
- Balance transfer provides a chance to improve credit score: The money you can save on interest due to balance transfer can be eventually used to pay down the balance and reduce the overall debt faster. This is always good for credit score. However, on most occasions, the balance transfer does not have any huge impact on credit score as at the end of the day it involves moving the outstanding balance. Carrying a large revolving debt may however impact your overall credit score in a major way.
There are a few major things that need to be kept in mind:
- Any new purchases made on the credit card after a balance transfer does not enjoy any interest-free period. Interest is charged from the very day the transaction is made. It is wise not to make any fresh purchases on a credit card until the amount is paid off.
- Credit cards charge a one-time processing fee for doing balance transfers. This seems to be a small amount but can quickly eliminate any savings made by doing the balance transfer in the first place. The effective savings come down.
- People forget to account for the service tax that is applicable on interest charges. High-interest rates mean higher service tax payable.
- Avoiding bad credit habits: You need to be careful about the spending that led to so much debt in the first place. After balance transfer, carrying on, in the same manner, is only going to increase the debt more and more. So it is advisable to keep a track of past statement to establish a stricter budget and spending plan so as to not get drowned in debts.
Balance transfer does lead to some savings but may not be as substantial as it is portrayed to be. However, one needs to be cautious while exploring the new balance transfer cards.
It is best to use the new card to its fullest benefits and take steps to assess how the need to avail more new balance transfer cards can be avoided. As it can eventually affect the credit score, one needs to be careful.
Paidkiya is one of the leading credit card services that help customers with all they need. Get in touch with them to know more about how balance transfer can affect credit scores.
Credit card to Bank transfer