How it works: Credit card balance transfers

WEALTH explores the nitty-gritty of credit card balance transfer, when can you avail this option, how does it work, and so on.

What is credit card balance transfer?
You can use this facility to transfer the debt on your current credit card to another company's credit card for a lower interest rate and a specific time period.

This will help you save significantly on mounting interest costs. That is, you can get a timely breather and keep your outstanding amount constant without further adding interest cost to that amount.

How does it work?
Credit card companies have forms, where you can request for balance transfer facility. You need to provide details such as your credit card number, credit limit, expiry date, the outstanding amount or the amount of money you wish to transfer to your existing credit card account, etc.

To enable the transfer, you need:
1. Photocopies of the card
2. Last few bill statements
3. Address proof, and
4. Other standard documents

It may take 10 to 15 working days for the facility to be enabled. The credit card company will send a demand draft issued to your existing credit card account. In effect, you will, now, repay the amount to the new credit card company.

What are the interest rates and other charges?
The interest rates for the balance transfer facility will be lower than what you pay for your existing credit card. These lower interest rates can be between 0.50 and 2 per cent depending on your existing interest rate and the bank that offers you the transfer facility. However, even the lower interest rate period is available only for a fixed time frame after which normal interest rates apply.

You have other options such as a zero interest repayment for a fixed period of time. Here, you need to repay the entire outstanding amount or balance transferred within a time frame of 3 to 12 months, depending on the options provided by the bank.

The associated charges like the processing fee can also vary according to the time period you opt as the zero interest period. This can vary between 2 and 9 per cent depending on your bank and what you have opted for. Of course, other charges like service tax etc. are also levied.

Points to remember
1. When you avail a balance transfer, the credit limit of the existing card will also reduce in proportion to the balance transfer facility availed. For instance, if you avail a transfer facility of Rs 40,000 and your current credit card has a credit limit of Rs 1 lakh, after the balance transfer the credit limit of your existing card will become Rs 60,000.

2. Credit card companies, usually, offer balance transfer option for those who have held credit cards with their previous credit card company for at least one year. This prevents credit card holders to keep 'card hopping' to consistently avail zero interest rates or lower interest rates.

3. Do not miss any minimum payments and other charges levied with your existing credit card while the balance transfer facility is in process. Also refrain from using it till you make the transfer.

4. Remember to pay off all your dues within the time frame in which you get zero interest or lower interest rate.

5. New purchases and expenses on the new card will not fall under the lower or zero interest rate, as applicable to the amount utilised for the balance transfer.

Abitha Deepak is Head of Content & Research at BankBazaar.com - An online marketplace where you can instantly get loan rate quotes, compare and apply online for all your personal loan, home loan and credit card needs from India's leading banks and NBFCs.

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