FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Balance of transfer on cards–Make most of it!
Have you ever run into a situation where you find your current outstanding dues on your credit card suddenly overwhelming? Do you wish you had better benefits on your card? There is a way out which will give you more time to pay off the dues and also get rid of your current credit card. Balance of Transfer facility is the answer.
What is `Balance of Transfer’ ?
It is facility offered by credit card issuing companies to card holders wherein the outstanding balance on the credit card can be transferred to a less used card or a new card. Banks provide incentive for customers who use balance of transfer by providing a low interest or interest free period.
When an individual opts for balance of transfer, the less used card or the new card from which the facility is being used will lower the credit limit proportionately to the balance transfer amount. So if your credit limit is Rs. 100,000 and you have opted for balance of transfer to the tune of Rs. 40,000, your credit limit will be reduced to Rs. 60,000. Also, balance of transfer limit cannot exceed 80% of the credit limit.
When is it useful?
- High interest rate charged: If individuals face a situation where the interest rate charged by a new credit card is lower than what is charged by the current credit card, interest cost could be reduced by transferring the outstanding balance to the new credit card.
- Dissatisfied with the service: For those individuals, who are not content with the service provided by the current credit card company, due to various issues such as improper billing, non receipt of bill among other things, can opt for balance of transfer. The individual can transfer the balance of such a card to another card and get rid of the old card.
- Inability to finance the debt: If an individual has a high outstanding balance on a card and is unable to finance it currently because of short term liquidity crunch, or if the individual has an exorbitant debt to pay off, balance of transfer can come a temporary relief.
In order to induce customers, banks offer low rate of interest or sometime even zero interest on balance transfer for around specified period. What is noteworthy is the fact that these attractive rates (zero or low rates) are valid for only an introductory period i.e. 3-6 months, post which the bank will start charging you the normal rate of interest. A processing fee is also levied by banks which can be in the range of 2% and 5% of the total amount.
Let us take the example of Bank ABC which offers two plans for balance of transfer:
1. Transfer at 0% interest rate for 3 months, 2.95% interest rate after the 3rd month and 2% processing fee or Rs. 199 whichever is higher.
2. Transfer at 0.75% for 6 months, 2.95% interest after the 6th month and 1% processing fee or Rs. 100 whichever is higher.
Inform the credit card company to whom you would want your outstanding debt to be transferred to.
- Fill in the form provided by them with details pertaining to your old credit card along with a copy of your latest credit card bill and submit it.
- Within 7-10 working days, the credit card company will send you a demand draft (DD) which will have the name of your old credit card issuer on it. After having submitted this DD to your old credit card company, your outstanding debt gets cleared with them and the same will be transferred to the new credit card issuer.
In order to make the most of the balance of transfer facility, make sure you make the maximum payment during the low interest or interest free period so that your finances are not impacted when the interest rate kicks in. More importantly, note that moving from one card to another is provides you with temporary interest relief. Also, do remember any purchases and expenses on the card on which you have opted for balance of transfer will not fall under the low or zero interest purview.