Choosing a balance transfer card effectively comes down to two primary things.
- The balance transfer fee: Most 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 in to 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 processing fee is 7.50%, you will be charged Rs. 7,500 in form of processing charges upfront.
- The promotional APR: To incentivize cardholders to switch credit cards, banks offer promotional Annual Percentage Rates (APR) which is generally 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 that bank will start to charge you APR, which may be lower 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 2.00% per month after the promotional period ends. In such an instance you will still stand to save some money. You can end up saving approximately Rs. 12,000 in interest payments over the course of a 6 months period on Rs. 100,000 of credit card debt through a balance transfer
The two points elicited above should be used to guide your decision on choosing a card provider to transfer your balance to.
Some of the other pointers 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. 19,500) for the 6 months period. Whereas transferring onto a card offering 0% APR for 6 months will cost you 7.5% (ie. Rs.7,500) in processing fee, and that’s it.
- 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. But you can still stand to save should you be smart about it.
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 servicing 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 then check what the processing fee is upfront for a balance transfer card you have identified, usually this is between 3% – 5% of the balance being transferred. Check the promotional APR period, and the applicable APR after the promotional period.
You can see the impact smart decisions can have on your finances. I hope to continue to help average Pakistani consumers like you. Keep logging on to learn new money management tricks!