Choosing a Balance Transfer Credit Card
Choosing a balance transfer card effectively comes down to two primary things.
- The balance transfer fee: Most credit cards will charge you a fee to transfer your balance from one card to another. This usually entails an upfront cost. It is important to factor this into your decision making. The fee is usually a percentage of the amount you are transferring. So if you are transferring Rs. 100,000 from one card to another and the fee is 3%, you will be charged Rs. 3,000 in form of processing charges upfront.
- The promotional APR: To incentivize cardholders to switch credit cards, banks offer promotional APR’s which are lower than the prevailing APR for a specific time period, ie 3 months, 6 months, 12 months or longer. Some banks will offer 0% for a certain period, this is a great opportunity to pay off a large chunk of your debt without paying any interest. However, bear in mind these are promotional rates which are only valid for a specific time period. It is important to point out that upon the expiration of the promotional period you will still be charged a lower annual percentage rate (APR) than the regular APR. For example, if the regular APR is 3.25% per month, your balance transfer will be subject to an APR of 0.00% for the promotional period, so you still end up saving. You can end up saving approximately Rs. 12,000 in interest payments over the course of the 6 months on Rs. 100,000 of credit card debt through a balance transfer. This savings can be amplified if you are doing it for the year.
The above two points should be used to guide your decision on choosing a card provider to transfer your balance to.
Some of the other elements to help your decision are as follows:
- Are the savings worth it? The interest cost of keeping the balance of Rs. 100,000 on your current card is approximately 3.25% (ie. Rs. 39,000) per annum. Whereas transferring onto a card offering 0% APR for 6 months will cost you 7.5% (ie. Rs.7,500) in processing fee, and 2.00% in interest payments from the 7th month onward.
- How much of the balance do you intend on carrying after the promotional period? If you intend on carrying some of the balance for a longer tenure than the promotional offer it will obviously result in a different equation
To see the benefits of a balance transfer credit card check what you are paying towards your existing credit card. Usually, your monthly minimum payment is 5.0% of the outstanding balance. Out of this monthly payment usually, 2.9% – 3.25% will go towards interest and the remaining will go towards principal reduction each month. Multiply these amounts by 12 to see what you are paying a year.
Once you have done the above material then check what the processing fee is upfront for a balance transfer card you have identified, a typical balance transfer upfront processing fee is between 3% – 15% of the balance being transferred. Check the promotional APR period and the applicable APR after the promotional period. If you exercise a balance transfer, your goal should be to wipe out the debt before the promotional APR period expires.
For a better approach, compare credit card deals and offers from the karlocompare platform and get yourself the best of the best.
I have prepared a small illustration to help you understand better.