22 Jan 2018 15:16 IST

Transferring your credit card balance

You can transfer the outstanding balance from one card to another at lower interest

Has the year-end holiday left you with unexpected expenses? Did you go on a spending spree and are now wondering how to repay your outstanding credit card dues? As you may be aware, paying only the minimum due or failure to repay the outstanding balance in your credit card on time will result in exorbitant interest costs. If you are faced with a temporary cash crunch and want to reduce this interest burden, here is an option.

Credit card providers offer what is called “Balance Transfer” to another card, which may offer lower interest charges on the transferred amount for a limited period of time. The card to which you transfer can be another less used card or a new card. But remember, this option is not a permanent solution but only an interim arrangement to tide over your cash flow mismatch.

What is it?

Under the balance transfer option, you can transfer the outstanding payment from one card to another at much lower interest cost.

The interest rate charged for balance transfer is much lower than the charges for late payment. For instance, Standard Chartered Bank, whose charges for non-payment of credit card dues range from 2-3.5 per cent per month, levies just 0.99 per cent per month on the balance transferred from other bank credit cards.

But keep in mind that this discounted rate of interest is applicable only for a limited period of time. The tenors broadly given by most banks are three and six months. After this period, the normal interest charges come into play. Some banks like Citibank offers the discounted rates for balance transfers for a much longer period ranging from 15 to 21 months.

How it works

Balance transfer is accepted only if a minimum eligibility criteria is met. For instance, ICICI Bank allows balance transfer only if the minimum outstanding balance in the other bank credit card is ₹15,000; also, one should already have an ICICI credit card to be eligible.

There may also be limitations on the maximum amount that can be transferred.. State Bank of India (SBI), for example, allows up to 75 per cent of the outstanding amount to be transferred to SBI credit card. The remaining 25 per cent of the outstanding should be settled by the individual.

Upon request, the bank will provide cheque, demand draft or do an online transfer to the other bank credit card for the amount equivalent to that being transferred. The time taken for transfer ranges between three and five working days. The process of balance transfer comes at a cost. There is a processing fee, which is a one-time cost. Some banks offer options to choose between interest rates, tenor and processing fee. For instance, SBI has two options. If you opt for a 60-day period, you will be charged a processing fee of 2 per cent of the amount transferred or ₹199, whichever is higher. But the interest rate is zero.

In the other option, SBI does not levy any processing fee but charges 1.7 per cent per month if you opt for a 180-day period for balance transfer. Also, remember that your credit limit on the card to which you have transferred the dues will go down to the extent of the transferred amount.

Take note

Balance transfer is, no doubt, a good option to reduce the interest cost. But anyone opting for this should be cautious as the lower interest rate is applicable only for a limited time period.

Inability to repay within this time period will result in higher interest rates being levied. Also, the discounted interest rate is levied only on the transferred amount and not on the new purchases made with that credit card.

The processing fee is also an additional but one-time cost which has to be taken into account. You need to study all the options available for balance transfer and choose the one that gives maximum benefit.

(The article first appeared in The Hindu BusinessLine.)