Credit card debts could easily put you in financial distress. On the one hand, balance transfer can offer respite from the burden of high debts, but the risks, fees and conditions associated with balance transfer can make it unappealing to some. It is important to entirely understand the concept if you want to avoid getting deeper in debt.
How Does Balance Transfer Work?
Balance transfer, in the simplest terms, is the process of transferring your debt balance from one credit card to another, most typically to take advantage of lower interest rates on credit cards in competing banks.
Banks in the UAE offer preferential interest rates to customers wishing to switch their outstanding balance. The most bankable balance transfer credit cards, however, offer zero percent interest for a period of three, six or even twelve months.
How to Use It Most Effectively
Used right, balance transfer can work as an interest-free loan. If you have debts piling in high interest credit cards, moving them across to a low interest card can help you tackle them better.
If you carry balances on multiple cards, consolidating all the unpaid debt to one card not only eliminates the hassle of making several payments each month, it can save you a great amount of money.
How Banks Profit from Balance Transfer
Banks offer balance transfer deals to grab market share from their competitors.
The main income for the bank in case of balance transfer comes from the processing fee, early settlement fee or cancellation fee, but most importantly from borrower default. The processing fee is usually a percentage of the amount transferred and can range from one percent to three percent. Early settlement and cancellation fee is usually a fixed amount and can be anything in between AED 100 and AED 300. It should be noted that some banks do offer penalty-free early settlement. Borrower default, however, is the main source of revenue for banks because of the unusually high interest rates on such cards.
If you intend to settle your arrears within three months, you may be able to find a balance transfer program in the UAE that offers credit cards at zero percent interest and with zero processing fee.
Risks of Balance Transfer
The debt payoff strategy using balance transfer credit cards requires a great deal of discipline. First and foremost, the amount you transfer can only be lower than the limit on your new credit card. Secondly, you cannot use balance transfer card for any additional purchases since that may attract a reasonably high interest rate. And last but not the least, you must continue making the minimum 5 percent payment toward your outstanding balance every month. Ignoring a payment or late settlement can forfeit the terms of balance transfer deal and can accrue a penalty or standard interest rate on the entire outstanding balance.