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The credit card is one of the most used products in terms of credit arrangements around the world. With the growing demand, the banks now offer credit cards for specific needs like travel cards, shopping cards and many more. With credit cards, the most important factor is to know the art of spending and maintaining a decent credit history with prompt repayments, failing to which a card might leave you with accumulated debt at a high-interest cost. To relieve yourself from high-cost debt, banks now offer easy balance transfer facilities at zero interest rate.

A balance transfer is a facility where one can relocate or transfer their existing debt to another lender. The terms of transfer might include a nominal processing fee and as most lenders offer the interest rate applicable is zero or less than the existing rate of interest. The balance amount transferred is to be repaid within a stipulated time as discussed during the process of transfer, after which the interest rates are changed to market average or as per the bank’s norms. 

However, there are specific balance transfer credit cards specially designed to consolidate your debt with low-interest rates which includes zero interest rate for a specific period of repayment. 

Before choosing the right balance transfer option for your high-cost debt, you should know the difference between BT and Debt consolidation. A debt consolidation scheme is a process of collecting all existing debts at one place by the means of availing a loan to pay-off other high-cost loans. Balance Transfer cards are one way of debt consolidation, one should understand that all kinds of balance transfer are a type of debt consolidation, however, balance transfers are not the only measure to consolidate your existing debt. Debt consolidation also includes availing personal loans or taking loans from friends or family to pay debt. 

Some major Balance Transfer Credit cards are:

1. Bajaj Finserv RBL Bank Supercard
2. SBI Platinum Card
3. Axis Bank Insta Easy Credit Card
4. SBI Card Elite

Common mistakes to avoid while going for a Balance Transfer:

• Not exploring options with your existing credit card company/bank

This is the most common mistake that people do while opting for a balance transfer. We must ensure that before opening a new account or applying for a new card, we must talk to the current credit card issuer and ask for a lower rate of interest.  Most of the card issuers entertain such requests if your repayment history and the overall credit history has been good. Though you won’t be able to bring it down to 0%, but it might save around 5-6% of your overall interest burden.

• Not calculating the overall expense of a balance transfer

You must always calculate the overall interest burden and the transfer expense of your new card. Most cards offer the interest-free period for a period of 6-12 months to pay off your existing debt, anything going beyond that period will attract the normal rate of interest. 

Let’s say if you transfer ₹ 50,000 of debt on 0% interest and 3% processing fee, you would have to pay ₹ 51,500 over a period of 12 months, which comes down to ₹ 4,291 per month. Any amount left after the 12-month period will bear the normal rate of interest.

• Loading additional credit on the existing card or the newer one

Balance transfer is a very effective way to clear out your growing debt burden, however, it takes great discipline to pay-off debt and not incur more at the same time. The main reason behind not doing so is here – the additional debt being taken is considered to be of lower priority till the time you pay off the transferred amount. All your payments are diverted towards the principal payment of the balance, by the time it is settled, all additional transactions will bear the normal rate of interest, which would not be advisable.

• Not having a repayment strategy according to the zero APR period

After you transfer your existing debt to a new card, you must carry out a definite plan on how to pay off your debt in due time. Anyone trying to hit on their credit card debt needs to plan a budget. First, you must calculate all your monthly income and expenses and know how much money you can pay for the debt at the earliest. Then you must plan your expenses accordingly instead of spending like a haywire. 

• Closing your existing credit card

As suggested in a point mentioned above, you must not incur more debt on your old card, as well as you do not need to close that card either unless it has a sky-high annual fee that needs to be paid. Closing a credit card will affect your overall credit history and ultimately hurting your credit score by some points. It will also increase the overall credit utilization ratio, which will also impact the credit score.

In view of the points mentioned above, if you do not allow yourself to commit these mistakes while you avail a balance transfer card, you might end up saving a lot more than you were actually going to pay. If you decide on a repayment strategy to pay-off your debt before the 0% interest rate period expires, it will help you to get out of the high-interest debt early and you can utilize the nominal interest on the credit thereof.