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How to repay credit card debt

If you transfer your dues to another card, you would pay a much lower rate on the second card. This may help manage your debt better. But never make it a habit or add more debt. Bindisha Sarang explains

india Updated: Apr 27, 2012 23:46 IST
Bindisha Sarang

Gone overboard on your credit card and finding it difficult to handle the bills? A balance transfer may work for you. However, a word of caution: This is an option, which should be exercised once in a while. If you make a habit of it, it may eventually get you into a debt trap.

We join two friends, Sid and Sam (two fictional characters) in their conversation to know more about credit card balance transfers, how they work and things to keep in mind while using the facility.

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Sid is sitting dejected, staring at his credit card bill, when Sam walks in.

Sam: What’s up?

Sid: My credit card statement.

Sam: What does it say?

Sid: I went overboard on my card, due to that foreign trip, the digital camera I bought and that iPad I could not resist. I don’t know what I was thinking then.

Sam: Well, you were not thinking. Anyway, can I help?

Sid: I am not sure how I will manage to pay this huge bill. It's over R1 lakh now. And the company charges an interest rate of 40% per annum.

Sam: 40% per annum is a lot. Maybe you should consider a credit card balance transfer.

Sid: What’s a credit card balance transfer?

Sam: It’s a facility offered by banks on credit cards, wherein you can transfer outstanding balance from one credit card to another.

Sid: What’s the benefit?

Sam: When you do a balance transfer, usually you pay a much lower interest rate on the card on which the balance is transferred. So that way, you are able to manage or pay the monthly dues with some ease. Lower the rate, lower the cost.

Sid: Sounds good. Please tell me how this balance transfer works?

Sam: Usually, you can do two types of balance transfers. One is the "fixed duration" option and the other is the "lifetime duration" option. It depends on the bank you approach.

Sid: Tell me a bit more about each option.

Sam: The fixed duration option is a limited period offer, usually 3-12 months, where you need to pay your dues within that period of time. In this duration, the bank offers you a lower interest rate around 0.80% per month or 9% per annum. In fact, some banks may even give you a full interest waiver if you plan to get a new card. Of course, the interest rate offered would vary from bank to bank.

Sid: I just have one card as of now. So I will anyway need to get a new card for balance transfer. But what if I am unable to pay the due within the limited period of time, what happens then?

Sam: In that case, the bank will charge you the regular rate of interest, which could be similar to the rate you are paying on the current card.

Sid: Okay.

Sam: A few banks also give an equated monthly installment (EMI) option to pay back the dues. But again if you miss a payment, then your rate will increase to the regular rate of interest.

Sid: What about the second option?

Sam: In the lifetime option, you get a lifetime to pay back the dues. But the interest charged isn’t as low as the fixed rate option. It’s just slightly less than what you pay on your regular credit card. Around 1-2% per month or 12-24% per annum. However, most banks give limited period offer.

Sid: Okay, so how do I go about getting this transfer?

Sam: Just get in touch with the bank. Tell them you are interested in a balance transfer. Give details of your current card to the new bank. Do the required paperwork. After the new bank verifies the details, they will send you a demand draft within two weeks. The draft will be for the transferred amount in favour of the old credit card bank.

Sid: Okay, so I will have to do some research to get a good offer.

Sam: Yes, you can avail a balance transfer if you already have cards from different banks and they offer such a facility. This means that the same bank will not let you transfer balance on another card.

Sid: I will need to get in touch with another bank then.

Sam: Totally, most banks have information about balance transfer options on their website. In fact, if you’ve been a good borrower, you could also ask your original credit card lender to reduce your rate of interest. But that needs some good negotiation skills.

Sid: Well, I have been a regular borrower. But I am just way too upset with my current bank. I hope this transfer thing does not cost me a huge fee.

Sam: You will have to shell out some money as a one-time processing fee. But that is anywhere between a few hundred rupees to around 2% of the amount you transfer. The fee varies from bank to bank.

Sid: But, a word of caution.

Sid: Word of caution?

Sam: Yes, this facility is a temporary solution to your current problem of out-of-control dues, which you need to pay back at high interest rate. If you fall into the habit of balance transfers every now and then, you may fall into a deep debt trap.

Sid: That’s the last place I want to be in.

Sam: True.

Sid: Can I use the new card to make purchases?

Sam: Yes, you can, but for the new purchases, you will need to pay the regular rate of interest. I suggest you just use the card to transfer the balance and get rid of the debt as soon as possible. Don’t add more debt.

Sam: Balance transfer is a temporary solution. Do that balance transfer. I think, you probably need help to manage debt. So let me put you in touch with a credit counsellor so that you don’t find yourself in such a situation in the future.

Sid: Thanks.