Should you transfer your credit card balance?

It can help in consolidating debt and bringing down interest cost if converted into EMI

Have you been receiving calls offering you a lower interest rate on your credit card balance if you transfer it to another bank? While there are advantages, there are few conditions to consider before you jump at the offer. 

A balance transfer can work either by transferring the balances on multiple cards to a single card, or by converting the balance into an Equated Monthly Instalment (EMI). 

"It makes sense only for those who are revolving their credit card dues. This means they are not delinquent, but pay only the minimum or a little more than the minimum of the outstanding. If you are one of those who pays your dues in full, it makes no sense to transfer your balance,'' says Jairam Sridharan, Head, retail banking, Axis Bank.

In case you have more than one credit cards and you are revolving the dues on all of them, then you can transfer the dues to one card. This will help consolidate all your debt in one place. It is convenient as you have to track only one card. It will also help your credit score, since you will be revolving just one card and not two or three. 

Another reason why you may want to consider transferring is if the other bank offers a lower interest rate. For instance, if your bank is charging 2.85% per month, while another bank offers you 1.5% per month, then it makes sense to transfer. Even if you continue to revolve your balance, it will be at a lower interest rate.

If one of the cards offer better reward points or has better loyalty programmes, then you can transfer to get better value proposition.

You can also consider transferring the balance if you get the chance to convert the balance to EMI, which your bank may not allow. 
 

"This is better because there is certainty about the amount to be repaid every month and because the rate is usually lower than in case of revolving the credit,'' says Sridharan.

Opting for the EMI option can save around 1.5-2% per month on interest payments on the amount outstanding, says Rajiv Raj, Co-Founder & Director - CreditVidya, an online credit counselling centre. For e.g credit card rates on outstanding balance will range between 36-45% per annum while transfer of credit card balance into EMI payments will attract only 18-24%.

But balance transfer will also include charges in the range of 1-2.5% of the outstanding amount, warns Raj. 

Some banks may have a certain minimum amount, below which they will not allow you to transfer and some may insist that the card should have been used for at least six months before transferring. Some banks may permit you to transfer only 75% of the existing card limits.

For instance, assuming you have a credit limit of Rs 1 lakh on Card A and an outstanding of Rs 90,000. If you want to transfer to Card B, it is possible the second bank (card B) may insist that you first bring down the outstanding on Card A to Rs 75,000 before allowing the transfer.

"It is a risk perception for banks. They don't want customers who are very risky,'' says Raj.

But remember that transferring from Card A to Card B will open up the limits on Card A. So, be careful if you are the kind who tends to overspend. A safer option would be cancel Card A, in this case.

Cardholders must also remember not to make multiple inquiries for card transfer as it gets reported in credit bureau which may have impact on credit score, adds Raj.