Should you close credit card debt with a personal loan?
A balance transfer is nothing but changing your current credit card company to another or closing it off with a personal loan at a much lower interest rate.
Let us begin at the beginning. What is exactly meant by balance transfer and how does it benefit you as a customer? Let us assume Mr Arvind has three credit cards. And he is a bit careless when it comes to paying the dues and EMIs on time and end up paying a hefty interest at the rate of 3-4 per cent every month (36-48 per cent annually) on the outstanding amount against his cards. It eventually reached a stage when he could barely manage to repay, and the balance amount started piling up. At this point, he was advised to transfer the balance to another lender, and he did so. Needless to say, Arvind can settle his loan more easily than his credit card debts.
In simple terms, a balance transfer is nothing but changing your current credit card company to another or closing it off with a personal loan at a much lower interest rate. Of course, it does not make you debt-free. But at least you won't have to pay a heavy interest anymore. Many new-age fintech companies encourage customers to do that with their own credit card refinancing or balance transfer loans at a reduced interest, in the range of 14-20 per cent.
How it benefits
Apart from the huge amount you can save in interest, transferring your credit card outstanding amount to a personal loan has another benefit. It will make a positive impact on your CIBIL score. Not only are you taking smart actions to repay your debts, but you are also proving that you can handle credit effectively by changing from a pricey loan to a relatively cheaper one. However, there is no escaping the fees; so, remember to ask the lender about them.
Also, consider the following points before you pay off your remaining credit card debts with a personal loan:
- You should thoroughly read the terms and conditions of credit card balance repayment as well as that of the personal loan you are about to raise. Compare and check if the switch makes sense.
- Many credit card providers mention zero per cent APR (annual percentage rate) on the outstanding amount for the first few months. But they do not give you any grace period for new bills you pay with your credit card.
If you think balance transfer is the best option for you, apply for a personal loan that will cover the total amount due on your credit card/s. It may not be easy as most banks insist on a 750-plus credit score. The balance amount, as well as records of missed or late payments, will also go against you. Applying to the same bank whose credit card you are using might not be a good idea either. In such a case, it would be better to approach a suitable lender.
Online lenders have streamlined the entire process, and one can get the necessary amount credited to his/her account in 24 hours. The process is quite fast - submission of documents, verification and approval can all be done in just one day. To collect required signatures on documents and other necessary papers such as ID proof and security cheques, an official will be sent to your residential or office address as per your convenience. In short, you do not have to make multiple trips to the lender's office. While looking for a loan, do not apply to a lot of companies or make official enquiries as it can bring down your credit score.
So, go ahead and pay your credit card balance with a personal loan. Even if you repay a day earlier, it can make a difference in the interest you pay.
Aditya Kumar is Founder and Chief Executive, Qbera.com