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Sun 3 Jun 2018 05:46 PM

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Could 'balance transfer' end your UAE credit card debt?

Opinion: Do the fees, terms, and conditions associated with balance transfer leave you wary of it, asks Souqalmal.com's Ambareen Musa

Could 'balance transfer' end your UAE credit card debt?
Souqalmal.com's Ambareen Musa

A balance transfer can be the perfect tool to help you pay off your outstanding credit card debt with little to no collateral financial drain.

But do the fees, terms, and conditions associated with balance transfer leave you wary of it?

Souqalmal.com's Ambareen Musa answers the key questions.

What is balance transfer, and how does it work?
Balance transfer, as the name suggests, refers to a transfer of your outstanding credit card balance from your existing card to a new one. This is usually done to take advantage of lower interest rates, and can also help you to consolidate multiple smaller credit card balances into one.

Most banks in the UAE run balance transfer programmes offering low interest rates, but the ‘Zero Interest’ balance transfer deal is the most sought-after of all. The interest-free tenure is usually limited to three to six months, with some banks offering longer tenures of up to twelve months too.

Can balance transfer help you get rid of debt? Yes…
A balance transfer done right can work like an interest-free loan. Here’s an example to demonstrate how balance transfer works in practice:

Let’s say you have an outstanding balance of AED 20,000 on your existing credit card, and the monthly interest charged by the card provider is 3 percent. If you repay AED 2,500 per month, it will take you about ten months to repay the debt in full. You will also end up paying close to AED 3,500 in interest payments.

Now if you were to roll over this balance to a new credit card that offers zero percent interest for 12 months, you can keep repaying AED 2,500 towards your credit card dues every month, without accruing any interest. At zero interest, it will take you eight months to pay off your debt.

What’s in it for the banks?
Banks charge a processing fee to lock in a zero interest rate or lower-than-usual interest rate on your balance transfer. This processing fee is usually expressed as a percentage of the balance transfer amount and ranges anywhere from 1 percent to 3 percent of the amount transferred.

Generally, the shorter the zero or low interest tenure, the lower will be the processing fees.

Besides this, there may also be an early settlement fee or cancellation fee applicable. While there are a few banks that allow penalty-free prepayment of the transferred balance before the end of the programme tenure, others may charge a fee of AED 100 to AED 300.

If you have the intention and the funds to repay your previous credit card balance in, let’s say two to three months, you may be able to find a balance transfer program that not only comes with zero percent interest, but zero processing fee too. Some banks in the UAE run these offers for shorter tenures of up to three months.

What’s the catch?
The debt payoff strategy using balance transfer only works if you don’t take on any additional debt on your new credit card. Any additional purchases that you fail to repay by the due date will attract a high interest rate.

Remember – you can always change your credit card, but if you don’t change bad financial habits, you will land back in debt.

You must also keep making the minimum 5 percent payment towards your outstanding balance every month. Failure to do so, could lead to forfeiture of the balance transfer terms and you may end up being charged the standard interest rate on the entire outstanding balance.

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