with easy credit available in the Indian financial market, now it is possible to live the life of your dreams.
whether you're looking to finance a house, go on a vacation, or gift your parents a swanky new car, there are loans to help you with the expenses. moreover, there are credit cards to buy things that would otherwise be beyond your budget.
however, what most people don't know about credit is that there is an easier way to repay the outstanding amount. it may come as a surprise, but reducing your overall liability is now possible with a solution, termed as a balance transfer.
don't worry if you have never heard about it before. we have tried to cover it for you in this article and also explained how it could help you save money.
a balance transfer is best explained as a way to move a part or the full amount of your outstanding credit to another account.
you can use it to transfer the principal amount of loans like home loans and education loans to a new bank or institution.
moreover, you can transfer your existing credit card balance to a new one with a lower interest rate.
in today's time, almost all banks offer this facility to the customers. when you apply for a balance transfer, your new creditor pays your liability on your behalf to the previous one.
the financial market is dynamic, and so is your income.
there is a possibility that the interest rate was higher when you availed a loan from your creditor. the prevailing rates of interest may seem more attractive to you.
in other cases, your income could have increased, allowing you to pay more towards your monthly installments. in such cases, it makes sense to review the market and move to a competitor who can offer a better interest rate.
balance transfer also works in the case of credit cards. there is a possibility that you could have overshot your credit limit and have a high outstanding balance. in such cases, a balance transfer can come to your rescue.
with the documentation and the lengthy processes required for a loan, you may wonder if applying for a new is worth your time and effort. however, once you understand the benefits of a balance transfer, you may be more than willing to do it. let's look at them in detail.
reduce your liability
the monthly installment that you pay covers both the principal and the interest in parts. the remaining interest gets added to your outstanding amount. as a result, your overall liability increases over time.
when you come across a loan offer that allows you a lesser interest rate, you should lap it up.
buy more time
at times, your current financial situation may not be favorable to pay the monthly installments. it could happen due to a personal emergency, loss of a job, or setbacks in business. thus, a balance transfer allows you to renegotiate the terms of your loan.
you can approach the new lender and ask for a longer tenure of the loan. in such cases, your overall liability may increase, but you will get immediate relief in lesser monthly installments. with the loans taken care of, you can focus on more pressing situations on hand.
credit cards offer credit at a higher rate of interest as compared to loans. most of the cards charge you an interest of around 3.5%. if you overshoot the last date to pay your outstanding balance, the interest gets compounded daily. it is the reason why credit cards are the most expensive type of debt you can take.
however, when you transfer the balance to a new credit card, you also get around 3-4 months to arrange the money. of course, you must pay the minimum amount every month, but you can give yourself more time to manage the debt. moreover, you can also get a lesser interest rate loan and save money in the long term.
maintain a good credit score
it can be stressful to miss your monthly installment dates. apart from causing mental distress, it can also lower your credit score. maintained by credit bureaus, it defines your creditworthiness. if your credit score drops below 750, banks may reject your loan and credit card applications.
here is what you need to know about the process so that you can make an informed decision.
understand your credit limit
when you transfer the balance to a new credit card, you may have to let go of your credit limit. in fact, your credit limit gets reduced by the same amount.
let's assume that you have a credit limit of ₹1,00,000 and you transfer a balance of ₹50,000. in this case, your new limit will be only the remaining ₹50,000.
it also means that you can transfer your balance only when the bank is ready to give you a credit limit that is at least equal to your outstanding balance.
explore the option of personal loans
transferring your balance is effective only when you are sure that you will be able to repay your outstanding amount in the next 3-4 months of time. if not, you may consider taking a personal loan. it will help you in converting a large chunk into smaller and manageable monthly installments.
evaluate if the new interest rate is really low
as you visit a bank with your needs, you may be surprised to know that the bank manager is willing to extend a credit card with a lesser interest rate. however, don't get too excited.
the reduced interest rate will be only on the amount that you transfer. on any fresh credit that you avail from the new creditor, you will have to pay the standard rate of interest.
avoid card hopping
due to the advantages that balance transfer brings, there is a high chance of fraud. if not tracked, people will keep jumping from one credit card to the next. to avoid card hopping, banks take advantage of a system that tracks all credit card inquiries.
every time that you approach a bank for a new credit card, a soft inquiry gets made into your credit report. all banks and non-banking financial institutions look at your credit history before extending credit to you. if they find too many inquiries, they may reject your application.
to avoid such scenarios, do not apply for credit cards too frequently. moreover, you cannot apply for a balance transfer unless you have been a customer of your current lender for at least one year.
if you have a reasonably good credit score, you can expect a bank to approve your balance transfer request. otherwise, it may impact your credit rating. hence, it is advised that you check credit score online before sending a request.
if you are transferring your balance to an existing credit card, you will have to fill and submit a form online. usually, this process takes about a week's time.
if you are applying to a new card or a loan, the process may take up to a month. normally, the banks will transfer the amount to you via a demand draft, check, or online transaction.