Tanya Mukherjee, a journo and an avid shopper, opened her credit card statement one day, and was surprised to see a glossy pamphlet falling out. “Outstanding dues on your credit card? Avail of our power packed offer on balance transfer and save money! Hurry! Offer open for a limited time only!” it urged.

Should she go ahead and make use of a transfer facility? What should you do in such as situation?

First Things First: What is Balance Transfer

Say you have two credit cards. You use the first one, say an ICICI Bank-Big Bazaar card, to make your monthly grocery purchases. You use the second, a Citibank card, for other expenses such as shopping and eating out and miscellaneous purchases.

Say you purchased a new washing machine on your Citibank card three months ago, and have been paying only the minimum amount due every month.

Naturally, your Citibank card now has a substantial amount outstanding, on which you are paying a tidy interest of about 2.95 per cent every month. On the other hand, assume that the interest on outstanding dues on your grocery card is only 1.49 per cent per month.

If only you could transfer the outstanding from the Citibank card to the Big Bazaar card, you would save so much more each month by paying less interest, wouldn’t you? Balance transfer lets you do just that.

Simply put, it allows you to transfer the outstanding dues from one credit card to another.

How it Works

When you transfer your credit card outstanding from Card A to Card B, Card B’s company pays off the outstanding dues on Card A. Some banks, such as ICICI Bank, will send you a demand draft favouring the other credit card company for the approved transfer amount.

The transferred amount will now appear on the next Card B statement. You then pay off the outstanding on the Card B, at lower interest rates, in the form of equated monthly instalments (EMIs) over a pre-defined period, such as 6 or 12 months.

Although it sounds like a good thing, balance transfer has its advantages and disadvantages. Let’s look at both, starting with the advantages.

Make balance transfer work for you

Consolidate credit card debt:

Although having multiple cards guarantees that you’ll never lack for funds, over a period of time, you may find yourself struggling to keep up with all those payments.

In addition, you have to keep track of multiple payment due dates, since a delay of even a day means you end up paying a hefty late fee as well as interest!

If that sounds familiar, then you should consider consolidating your dues, and transfer the outstanding debt from all your cards to just one or two cards. That way, you’ll need to track fewer payment dates and chances of late payments decrease.
 
Get Lower Interest Rates

How do you decide which cards to transfer your balance to? Different credit cards—sometimes, even those from the same issuing bank or credit company—charge different rates of interest for outstanding credit and for balance transfers.

For example, ICICI Bank charges interest of 2.5 per cent per month on outstanding dues, and as low as 0 per cent on balance transfers (as always, conditions apply!). Citibank charges interest of 2.95 per cent per month on outstanding dues, but only 1.49 per cent on balance transfers.

Obviously, then, you need to study the terms and conditions of all the cards you own, and then identify the card(s) that offers you the lowest interest rate on balance transfers, along with a payment tenure that suits your capacity to pay off your dues.

Remember, you will be paying off the debt in the form of EMIs, so it is important to ensure that you are comfortable with the payment tenure or duration.