Outstanding offers

CARD CARE

Balance transfer gives you an opportunity to reduce the card burden. However, use this method judiciously.

Credit card bills, when rising too fast, need constant monitoring. Any delay in the repayment can result in a serious financial hit because of the high interest cost and other charges that are levied.

At the same time, credit card companies continuously give offers to lure new customers from their existing bank. One such offer is the balance transfer facility. Here, a person is allowed to shift the outstanding amount on one credit card to another.

The additional incentive, most times, is that the transferred amount is not liable for any interest charge for a specific period or has a lower interest rate for a specific period of time. When faced with such offers, the question before cardholders is whether to accept it or not? There are a few situations when it makes sense to make this important switch.

For starters, a common grouse is dissatisfaction with the existing bank because of lack of proper facilities and services. The most common reason is the high interest rate being charged by the bank on the credit card outstanding. Also, service-related issues like non-receipt of bills on time, incorrect billing or inconvenient payment dates are common issues. In such a situation, the individual would be better-off, if they change the bank and their credit card by opting for balance transfer.

Then, there could be a situation where the individual is unable to service the loan. There are two types of situations that could lead to this. One is a temporary situation where the immediate cash flow of the person has been adversely impacted so they might have some problem in paying-off the accumulated debt for a few months. The other situation is when the debt has become too exorbitant, making it almost impossible to service it, at least in the short run.
 

TRANSFER TIME

Outstanding: Rs 35,000

Interest rate per month: 2.95 %

Minimum payment (@5%): Rs 980.87

Balance transfer: Rs 35,000

No interest payment for 3 months:
Rs 2,878.43 (interest saved)

In such a scenario, undertaking the process of balance transfer will ensure that the immediate pressure eases-off for some time. However, postponing the repayment just to buy time will not help.

Another reason why a person could opt for a balance transfer is when any special offers are made to them. For instance, there could a situation where a bank offers a long interest-free period like, six months to one year. Such a situation will give a fairly good period for the person to enjoy interest-free credit and hence, it might be a good option. Of course, there are other conditions like higher limit, lower rates of interest and convenient payment dates that make things attractive for a cardholder to move to another bank.

A word of caution though – in some banks, the rate of interest may be zero in the initial months and they might be higher than your existing lender. In such cases, remember that the interim relief is just an eye wash. If you are not confident of the repayment abilities, then stay away from such offers.

Also, bring down your balance in that interest-free period drastically so that when the higher interest rate kicks in, the finances are not so badly impacted. Most importantly, remember that moving to another card saves you from the interest rate burden, but only temporarily. Use this window of opportunity to reduce the loan burden and do not start splurging, once you have been able to bring down your outstanding.

The writer is a certified financial planner