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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, you need to consider a few conditions before jumping at such offers.
“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,” says Jairam Sridharan, president (consumer lending) at AXIS Bank.
If you have more than one credit card and you are revolving the dues on all of them, then you can transfer the dues to one card. This will help to consolidate all your debt in one place and make it 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 you may want to transfer is if another bank offers a lower interest rate. For instance, if your bank is charging 2.85 per cent a month, while another bank offers you 1.5 per cent a 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 offers better reward points or has better loyalty programmes, then you can transfer to get better value proposition.
A balance transfer where you can convert the balance into an equated monthly instalment (EMI) is a better option, than transferring it to another card. “The EMI option 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 EMI can save 1.5-2 per cent a month on interest payments on the amount outstanding, says Rajiv Raj, co-founder and director at CreditVidya, an online credit counselling centre. For instance, credit card rates on outstanding balance will range between 36 per cent and 45 per cent a year, while transfer of credit card balance into EMI payments will attract only 18-24 per cent.
However, the balance transfer will also include charges of 1-2.5 per cent of the outstanding amount, warns Raj.
Some banks have a minimum amount criteria, below which they will not allow you to transfer. Some banks might insist that the card should have been used for at least six months before transferring. Some lenders permit you to transfer only 75 per cent 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, the second bank (Card B) might 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.
Credit card balance transfer as such does not impact the credit score of an individual. However, credit utilisation rate is an important factor. Credit utilisation rate is a function of current balance and credit limit available. “There is a strong correlation between high utilisation rate and credit risk. If an individual continuously carries high utilisation rate, it may indicate that financial difficulties are being faced,” says Kalpana Pandey, CEO and managing director at CRIF High Mark Credit Information Services.
Cardholders must also remember not to make multiple inquiries for card transfer as it gets reported in the credit bureau, which could have a impact on credit score, adds Raj.
