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In fact, consumer credit debt in Canada is an eye-popping $662 billion, which clearly indicates we are reaching for our plastic more than ever. That’s to be expected considering how much of our daily lives are moving online, from Amazon shopping to food delivery apps to rideshare. It seems everywhere we turn, the conveniences of paying online with a credit card is tempting us to swipe, tap, and worry about it later.
But all those online conveniences are coming back to bite us on the backside like a snapping alligator. To battle that bulging credit balance, one method is using a balance transfer credit card, which is a way to reduce credit card deficits via a more favourable interest rate during a promotional window. But using this method requires careful consideration, so let us guide you through how to take advantage of a balance transfer credit card.
What is a balance transfer credit card?
Yes, a balance transfer is exactly what it sounds like – the transfer of a balance from one credit card to another. Why would you do, what appears to be, a lateral move of paying off one credit card (or multiple cards) with another? Because while most credit cards command an interest rate of around 20%, balance transfer credit cards offer a much lower rate, sometimes even as low as 0% for a limited time.
If you are carrying debt on one or multiple high-interest credit cards, a balance transfer card
is definitely a solution to explore. More of your monthly payments can go to attacking the principal balance and less to servicing accruing interest.What you need to know about balance transfer credit cards
It may sound strange, but that credit card balance you’re carrying is something coveted by banks and financial institutions. They want your debt because it’s an opportunity to charge you interest on your balance. You can look at this as an advantage when shopping for a balance transfer credit card.
Be sure to compare the various promotions offered, like low interest rates, the duration for how long the low rate is offered and if no annual fee is possible. Don’t just immediately go for the lowest rate, though. Check the duration of the rate and consider how long you need to pay down your debt.
Balance transfer’s window of time
Some balance transfer credit cards offer extra benefits, such as fraud protection, rewards and discounts on travel services. But perhaps the most crucial element of a balance transfer credit card is the time window for which you are being offered a low interest rate. Credit card companies hope you keep using the card after the low interest promotion ends. As we said, your debt is valuable to them.
Most balance transfer credit cards offer a low single-digit or zero percent interest rate for the first six months and then the “real” rate kicks in. This is key: if you’re going to move your balance, you have to be prepared to pay down your debt in a fairly quick amount of time. Because once that promo rate expires, you’re right back to servicing the debt at a double-digit rate similar to what you’re already paying.
Here’s a quick calculation: You have a $5,000 debt and the balance transfer card is offering 1.9% for six months. That means you will pay $8 in interest per month ($95/12). To pay off this debt in six months, your monthly payments will be $841 ($833 + $8).
A good strategy for choosing a balance transfer credit card is to consider if the regular rate after the promo ends is lower than what you’re paying now. If so, then you’re winning either way. You get the super-low rate for six months or more, and then a lower regular rate to what you're paying now.
Be prepared for balance transfer fees
When shopping your debt around be prepared for the possibility of balance transfer fees. This is when a financial institution charges you a fee for moving your debt on to their low interest credit card. This fee is often expressed in a percentage, usually around 1% to 3% of the balance you’re moving. For example, if you’re moving $10,000 to a balance transfer credit card, you could be paying up to $300 for the privilege. Not all companies do this, but those who do might try to bury it in the fine print.
Best practices with balance transfer credit cards
If you’re serious about getting out of debt, then you can’t use your new balance transfer card the same way you did with your old one. When you use the new card, not only are you racking up new debt, but new purchases are charged the regular interest rate, not the promo rate. Furthermore, your payments are going to the low-interest balance first, while new purchases sit there longer, getting dinged with the higher interest rate.
The best practice for thriving with a balance transfer credit card is to leave it at home or use it very sparingly. At least until you’ve paid off the balance you transferred over because this needs to be your priority. Remember, if you’re serious about getting out of debt, you need to capitalize on that short window of low promotional interest. Because once the higher rate kicks in, you’re back to wrestling the alligator.
How to transfer your credit card balance
If you only have a short window of time with low promotional interest and transfer fees, you need to act fast. You should plan to pay off most (if not all) of your debts by the time the promotion ends. The first step in transfering your balances is by logging a balance transfer request with the new credit card company. You can do this over the phone or online. You need to provide the:
- account numbers of your old cards
- amounts that you want to transfer
Can I get a balance transfer card if I have bad credit?
Unfortunately, it can be difficult to get approved for a balance transfer credit card if you have less-than-fair credit. But bad credit doesn’t have to stay bad for long. Follow our tips on how you can improve your credit score, and you might qualify for a balance transfer credit card sooner than you think. And when that time comes, the Scotiabank Value® Visa Card is a good place to start. With its low annual fee and 0.99% balance transfer interest rate for the first 6 months, it’s an ideal card to kick off your debt reduction strategy.
Do balance transfers hurt your credit score?
If you get approved for a balance transfer card, your credit score may get dinged in the short term. If you understand the components that affect your credit score, you’ll know that new credit accounts lower your average account age and suggest financial trouble.
But credit scores bounce back and then some! Paying off debt is a huge factor that will ultimately boost your credit score in the long run. Just make sure you make all payments on time!
Spring Financial serves Canadians facing all types of credit situations with practical advice and credit-building solutions. We also offer quick-and-easy secured and unsecured installment loans to help you take those first steps to a better financial future. Apply today to see how we can help!
