Credit Card Balance Transfer Schemes – Which Option Should You Choose?

You have always been regular with your credit card payments. However, due to a financial emergency, you have not been able to make full payments for the last two months. With partial payments, you do not even enjoy interest free credit period. High interest rates, late payment and different types of financial charges are compounding your problems. You also see a short term cash flow crisis which will prevent you from paying your credit card bills in full. You are looking for an option where you can bring down interest cost and avoid paying these extra charges.

There are a few options available to you such as taking out a personal loan to settle credit cards dues, converting your outstanding dues to EMI or doing a balance transfer to another or a new credit card. In this post, I will discuss various credit card balance transfer options available to you and the parameters you must consider while finalizing the best balance transfer scheme for you.

Credit card balance transfer involves transfer of your outstanding dues from one credit card to another credit card or an entirely new credit card. Outstanding amount on your first card will be settled by another credit card company. Repayment on the second/new credit card shall be governed by the terms and conditions of the balance transfer. In a balance transfer, you are offered relaxed repayment terms in form of lower interest rates or convenient EMIs.

Why Do Banks Offer Such Schemes?

Banks make such offers to acquire new clients. Additionally, these lower interest rates are only for the promotion period. After that, banks can charge regular interest rates from the customers. There is a significant income in the form of processing fees and other finance charges.

Different Types Of Balance Transfer Schemes Available

There are 3 broad options available to customers but not all banks offer all the options. The three options, along with the features are tabulated below.

Balance transfer Options	EMIs	Regular Transfer with low rates for fixed duration	Regular Transfer with perpetually low interest rates
Features	Balance transfer amount is converted to EMIs	Outstanding dues on the other card transferred for repayment at lower rates. Lower rates are applied for only a fixed duration. Regular interest/finance charges apply at the end of specified period	Outstanding dues on the other card transferred for repayment at lower rates. Lower rates are applied till the time transfer amount is paid.
Processing Fees	Applicable. Varies between 1-3% of the transfer amount
Prepayment charges	Applicable	Not applicable	Not applicable
Fresh purchases	Have interest free credit period	Unlikely to have any interest free credit period till such time balance transfer amount is repaid. Individual banks may have different policies.
Minimum Amount Due	EMI is added to arrive at Minimum Amount Due	Outstanding transfer amount considered for calculating Minimum Amount Due
Order of Payment Adjustment	This may vary across banks. Typically, if you do not make the complete payment, banks adjust towards charges in descending order of interest charges. Since regular purchases carry higher rate of interest, those are likely to be adjusted first. Exact order of charge adjustment is defined in the card agreement/balance transfer facility terms and conditions.
Other terms and conditions	Service tax is charged on processing fees, foreclosure fees or any other kind of fees. Service tax is also applicable on interest charges and interest portion of EMIs. Banks have a lower and an upper cap on balance transfer. The maximum transfer amount will be capped at 75-90% of the credit limit of the new card.

Please note this is a broad classification of transfer options available to customers. The banks may relax or impose some conditions in their promotional schemes. You are advised to look into these conditions before you finalize the scheme. The banks can also follow different nomenclature for these schemes.

Illustration

Illustration	Common Assumptions Balance transfer amount: Rs 50,000 Processing Fees: Assumed Nil for illustration purposes Fresh purchases of Rs 10,000 in the first month (made on first day of month) Minimum Amount Due: 5% of Outstanding Regular finance charges: 3% per month
EMI	Assumed interest rate: 0.5% for 3 months 3 EMIs of Rs 16,833.6 (Service tax to be charged on interest portion of EMIs) First month: Rs 16,868.6 Second month: Rs 16,857.0 Third month: Rs 16,845.3 Next credit card statement: Bill Amount: Rs 10,000 (fresh purchases) + 16,868.6 (First month EMI)= Rs. 26,868.6 Minimum Amount Due: 500(5% of Rs 10,000) + 16,868.6 = Rs. 17,368.8
Regular Transfer (fixed duration)	Assumed interest rate: 1.7% per month for 6 months Interest on fresh purchase: 3%*10,000 = Rs 300 (Rs 342 including service tax) Interest on balance transfer: 1.7%*50,000 = Rs 850 (Rs 969 incl service tax) Next credit card statement: Bill amount: Rs 10,000 + Rs 342 +Rs 969 = Rs 11,311 Minimum Amount Due: 5% of (10,000 + 50,000 + Rs 342 + Rs 969)= Rs. 3,065.5 Please note this low interest rate is only for 6 months. If you do not repay the complete amount within six months (by making extra payments over and above the bill amount), you will be charged regular interest charges after six months.
Regular Transfer (Perpetual)	Assumed interest rate: 2% per month till the transfer amount is repaid Interest on fresh purchase: 3%*10,000= Rs 300 (Rs 342 including service tax) Interest on balance transfer: 2%*50,000=Rs 1,000 (Rs 1,140 including service tax) Next credit card statement: Bill amount: Rs 10,000 + Rs 342 +Rs 1,140 = Rs 11,482 Minimum Amount Due: 5% of (10,000 + 50,000 + Rs 342 + Rs 11,482)= Rs. 3,074.1

It might appear that balance transfer with EMI is the worst option. However, that is not the case. In the illustration, EMI option bill amount includes principal amount of Rs 16,584. In the other options, there is no principal repayment in the bill amount. The principal has to be repaid sooner or later. The sooner you repay principal amount, the less you have to bear in terms of interest outgo. Additionally, these conditions/calculations will vary across cards based on respective terms and conditions.

Which Balance Transfer Option Should You Choose?

Choice of balance transfer scheme will depend on how you plan to repay the existing credit card debt. Rather, the choice should depend on how your cash flows permit you to make the payment. Needless to say, the earlier you can settle the transfer amount, the better it is for you and your finances. However, you must choose the scheme you can afford to pay keeping in mind your cash flow position.

Here’s a representative sample of balance transfer schemes that are available from different banks.

Schemes	Processing Fees	Scheme Details
Scheme 1 (EMI)	Higher of 1.5% or Rs 199	0.5% per month for 3 months
Scheme 2 (EMI)	Higher of 1.5% or Rs 199	0.75% per month for 6 months
Scheme 3 (Regular Transfer fixed duration)	Higher of 2% or Rs 199	0% per month for 60 days
Scheme 4 (Regular Transfer fixed duration)	No processing fees	1.7% per month for 6 months
Scheme 5 (Regular Transfer perpetual)	1%	1.2% per month till balance transfer amount is repaid

Please note I have relied on the information about balance transfer facility available on websites of banks. The information on the website and thus in the above table may be outdated.

Before selecting a transfer scheme, you must compare the available schemes against each other and also against the status quo (sticking with the existing card and not transferring the amount). In non-EMI schemes, I assume that the payment will be made at the end of low interest period. For instance, if you opt for regular transfer with fixed duration, say 3 months, option, I have assumed that you will make the payment at the end of third month.

I consider two scenarios where you make the payment in 3 months and 6 months.

Balance Amount Transferred: Rs 2 lacs, Regular interest charges: 3% per month, No fresh purchases on the card during the period. No late payment fees considered. Accounts are regular during the entire term.

Schemes	Payment in 3 months	Payment in 6 months
Status quo (No transfer of balance)	Processing Fees: Nil Interest: Rs 20,520 Total payment: Rs 2,20,520	Processing Fees: Nil Interest: Rs 41,040 Total payment: Rs 2,41,040
Scheme 1 (EMI) (0.5% per month for 3 months)	Processing Fees: Rs 3,420 Interest: Rs 2,284 Total payment: Rs 2,05,704	Not Applicable
Scheme 2 (EMI) (0.75% per month for 6 months)	Not Applicable	Processing Fees: Rs 3,420 Interest: Rs 6,022 Total payment: Rs 2,09,442
Scheme 3 (Regular Transfer fixed duration) 0% per month for 60 days	Processing Fees: Rs 4,560 Interest: Rs 6,840 Total payment: Rs 2,11,400	Processing Fees: Rs 4,560 Interest: Rs 27,360 Total payment: Rs 2,31,920
Scheme 4 (Regular Transfer fixed duration) 1.7% per month for 6 months	Processing Fees: Nil Interest: Rs 11,628 Total payment: Rs 2,11,628	Processing Fees: Nil Interest: Rs 23,256 Total payment: Rs 2,23,256
Scheme 5 (Regular Transfer perpetual) 1.2% per month till balance transfer amount is repaid	Processing Fees: Rs 2,280 Interest: Rs 8,208 Total payment: Rs 2,10,488	Processing Fees: Rs 2,280 Interest: Rs 16,416 Total payment: Rs 2,18,696

If you know your cash flows well, you can choose appropriate balance transfer to reduce interest costs. If you can afford to pay off the debt in three EMIs, you can select Scheme 1. If you can pay in 6 EMIs, six month EMI option will be the best. If you are not sure about cash flows, you can opt for regular transfer with perpetually low interest rates.

A Few Things You Need To Keep In Mind

• A very high processing fee can nullify the savings due to low interest rates.
• There may not be any interest free credit period on the new card. Hence, fresh purchases should be avoided on the new card until the entire amount is paid off.
• Low interest rates are for a limited period. After expiry of promotion period, the charges of the new card may be higher than your existing card. For instance, your existing card may charge 3% per month, while your new card may charge 3.35% per month at the end of promotion period.
• If you do not keep your account regular by paying EMIs or interest amount in full, the interest rate can increase to the regular rate of interest.

Process Of Balance Transfer

There is little or no documentation required. The new credit card company/bank will issue a cheque/demand draft or make online payment to settle your dues with the existing card company/bank. You can check exact documentation requirements with banks.

Does A Balance Transfer Affect Your Credit Score?

Credit bureaus consider many parameters including payment history, credit utilization levels and percentage of unsecured loans to arrive at your credit score. With credit card balance transfer, the overall utilization limit does not increase. Since, the debt is only being transferred from one bank to another; a credit card transfer should not have any impact your credit score. However, if you approach too many banks at the same time for credit cards or personal loans, it reflects poorly on your credit scores. Hence, do your research online (about various schemes) and approach banks subsequently. And yes, you cannot default on your credit card payments (before or after balance transfer).

Conclusion

Ideally, you shouldn’t want to be in a situation where you have to even think about balance transfer. However, if you have gotten yourself into one, credit card balance transfer can give you much needed breathing space if you act responsibly. Try to find a transfer scheme that aligns well with your monthly cash flows.

A balance transfer can be helpful if you are only facing a short term cash flow crisis and intend to pay off the transfer balance within the promotion period. If you are regularly behind on your credit card payments, you have a more fundamental problem. You need to improve your spending behaviour. Balance transfer will only provide a short term reprieve in such cases. Irresponsible usage of the new credit card will only compound your debt problems.