The competition in the domestic card industry is gaining momentum. The pressure has finally begun to show on the fiercely competitive credit card market. Card issuers are trying every trick in the book to woo consumers to take a new credit card.
The latest strategy adopted by card issuers to increase their card base is the ‘Balance Transfer Scheme’. An interesting feature of this scheme is that a cardholder gets the option to transfer the outstanding balance on his existing card onto a new credit card. The benefit to the consumer comes in the form of a lower interest rate charge on the balance transferred. The rate is generally in the range of 1.45% to 3% per month. This rate is much lower as compared to 2.5% to 4% charged by credit card issuing banks for carrying forward the outstanding balance.
The first bank that adopted this strategy aggressively to increase its market share was American Express. The Bank offered a discounted rate of 1.99% per month on the balance transferred. This helped the bank to attract customers who were having credit cards issued by other banks, which charged a higher rate of 2.25% to 4% for the same facility. Since the rate broke out, most of the banks have dropped their rates on balance transfer scheme. Currently, ICICI offers a rate of 1.45%, which appears to be the very attractive. But these lower rates are for the initial months only, after which the rates revert back to the average level of 2.25% to 4%.
Well, the ‘Balance Transfer Scheme’ looks very attractive on paper. But there are certain things one should look at, before opting for the scheme.
The transfer of balance attracts the following charges:
Lets check out the viability of balance transfer:
Assumption:
1) Outstanding balance on the card = Rs 10,000
2) Joining fee for the card = 0
3) Annual fee = 700
4) Tenure = 6 months
5) Charge for balance transfer = 1.45% per month
6) Charge for carry forward of balance = 2.95% per month
Transfer cost:
Outstanding balance: Rs 10,000
| |
Balance transfer
to a new card (Rs) |
No Balance
transfer (Rs) |
Saving
(Rs) |
| Joining fee |
0 |
0 |
0 |
| Annual fee |
700 |
0 |
700 |
| Interest payment |
902 |
1,906 |
1,004 |
| Total |
1,602 |
1,906 |
304 |
The table clearly indicates that transferring the Rs 10,000 balance from one card to another card at lower rate results in a saving of Rs 304. But the result would change if the difference between the carry forward and the balance transfer charge were low. The other variable that will influence the result is the initial payment for the new credit card.
So, if you are planning to shift your outstanding balance from one credit card to another credit card, factor in all the cost involved before you take a decision.
