Balance transfer helps save revolving charges

Unable to clear rising credit card dues? Facing the brunt of steep interest charges? You are sure to have got calls to pay back in EMIs (equated monthly instalments). If you do not agree, credit card issuers give another option — of balance transfer.

It works like this. Say, you have credit cards of HDFC Bank and State Bank of India (SBI). SBI may call you, asking to transfer the balance on the HDFC card to the SBI card, at zero interest, saving you the revolving credit charges. You can transfer the balance to either an already held or a fresh one, without forgoing the original card.

For banks, balance transfer means getting new card users and a higher customer base, as you can’t transfer balance, within the cards issued by the same bank. This option can be used to lower the high interest charges on the dues. Or, get a higher credit limit.

Typically, the card issuer to whom the balance is being transferred would offer promotional schemes. Like, zero interest on the balance transferred for a period of, say, three to six months.

These schemes would vary across issuers. There will be a one-time processing fee, around one to three per cent of the amount transferred. The longer the offer period, higher the processing fee. On the other hand, some banks may offer a rate lower than that being charged by the existing issuer, implying savings from reduced interest outgo.

“Though there is an interest-free period of three-six months, a few customers actually end up clearing their dues in this period,” concedes a private sector banker heading a cards business. After this period, banks will levy interest charges.

Fresh transactions will continue to attract interest even in the zero-interest period, says Shyamal Saxena, GM (retail banking, products) of Standard Chartered Bank. For instance, you transfer Rs 50,000 from an HDFC Bank card to SBI (as in the example above) and use the SBI card for new transactions worth Rs 10,000. While the balance transferred won’t attract any charges, the new transactions will be charged, unless paid off fully at the end of the billing cycle.

Usually, there is a minimum payment clause towards the repayment of the transferred amount. Otherwise, the policies differ across banks. As in the earlier example, suppose you paid Rs 15,000 to settle a bill of Rs 10,000. How this amount is adjusted between the repayment of the balance transferred and fresh transactions will depend on the bank’s policy.

Some may attribute the payment entirely towards the balance transferred, till it is cleared. Others may prefer to clear the fresh transactions first and use the rest towards the transferred amount. Some may plit it equally. So, if you have an option, you would do well to choose your repayment preference upfront.

Therefore, it is suggested you opt for the balance transfer route only if confident of clearing the dues during the zero-interest period. Reason: Once the offer period is over, the rates applicable can be as high as 40-45 per cent. Otherwise, convert the dues into EMIs (monthly interest = 1.5 - 2.5 per cent for 12-24 months, maximum 36).

Once the offer period of one card gets over, many may opt for a second balance transfer. However, be careful while doing this, as banks keep track of users who keep transferring across cards to enjoy zero interest. Importantly, if you keep applying for fresh cards to do so, it will get reported to the credit bureaus. This could hamper your chances of getting any loans in future.