Transfer balance on credit cards; repay dues at cheaper rate

Banks often use this as a sales pitch to induce credit card customers to opt for a balance transfer. How does it work? The customer can either opt for a new card or transfer the outstanding amount to a less used card. The credit limit of the new/less used card will reduce to the extent of the balance transferred to the card.

 

For example, if you are servicing a credit card debt of Rs 1 lakh and the credit limit of the unused/new card is Rs 2 lakh, the credit limit will be reduced by a lakh once you opt for balance transfer The banks cash in on the fact that the interest rate is lower or close to zero on such balance transfers.

 

Even as this rate may vary from bank to bank, still the balance transfer rate will be much lower than the rate you pay on credit card outstandings. The credit limit of the new card or the less-used card on which you want to transfer the balance amount, reduces in proportion to the balance transfer amount.

 

Say the credit limit of your card is Rs 25,000 and you have opted for a balance transfer of Rs 10,000, then the credit limit on your original card will be reduced to Rs 15,000. There is an upper limit on the amount that can be transferred, which can vary from bank to bank.

 

 

The low rate or zero rate formula on balance transfers work only for 3-6 months from the date of the DD issued by the new credit card issuer. Once the grace period is over, you have to pay the same interest rate as applicable on the actual billed credit card.

 

The interest rate on credit card dues can be as high as 50%. So opt for balance transfer if you are confident you can repay the amount in six months. The processing time for issuing the DD is 7-10 working days.

 

The DD is issued in the name of the new credit card issuer. Once the DD is encashed, your dues with the old credit card are cleared and you have to start paying the new credit card issuer.