What is a balance transfer?
A credit card balance transfer is a great financial tool that allows a consumer to transfer their existing credit card debt to another credit card that offers a lower interest rate for a set promotional period. Interest rates for the introductory period (which often range anywhere from six months to a year) can be as low as 0% or as high as 3.99%. Typically, the new credit card issuer will charge either a percentage of the transferred balance (usually about 3%) or a set fee. Once the promotional period ends, the transferred balance will usually be subject to the credit card’s standard interest rate, often 19.99% or higher.
Read: Best balance transfer credit cards in Canada
Essentially a balance transfer gives cardholders some much-needed breathing room to tackle their credit card debt load and pay off as much as possible before the interest rate shoots up to normal (and much less manageable) levels.
Of course, a tool is only as good as the person who wields it, so you need to pay off as much debt as possible during the promotional period for a balance transfer to be effective.
When is it the right move?
The main reason to consider a balance transfer option is when you’re carrying debt on one or more credit cards with a higher interest rate and you want to pay it off. As long as you’re moving your balance owing from one credit card to another one with a lower interest rate, you’re making a smart choice and could save hundreds, if not thousands, of dollars (depending on the amount of debt you’re carrying). Though I will add one caveat: a transfer is only a wise choice so long as you pay off or significantly pay down your transferred balance during the promotional period.
When should you stay away?
A balance transfer only works if you’re going to be diligent about paying off the outstanding credit card debt. Therefore, a balance transfer is not right for you if you have no strategy to increase your payments or combat reckless spending habits to ensure your debt doesn’t just keep piling up.
Read: How to Pay Off Credit Cards Quickly and Cheaply
Furthermore, you should stay away from a balance transfer if the breathing room it affords you to pay down your debt will actually encourage you to spend more. For some consumers, a low interest rate can unfortunately encourage them to charge more to their credit cards because their debt feels more manageable.
Things to consider before you begin
Credit rating
While a balance transfer is almost always a good idea for consumers with credit card debt, there are some additional points to consider before you make a move. To be eligible for a balance transfer you’ll have to apply for a new credit card with a balance transfer promotion. Many credit cards in Canada require a specific minimum credit score, so be sure to check what score is needed before you apply. (Read our Ultimate Guide to Credit Scores to learn how to find and read your score.)
If your score is not high enough, you may want to check out whether there are any low interest credit cards you may be eligible for.
Read: Best low interest credit cards in Canada
The transfer fee
Another consideration is the transfer fee. Most credit cards charge a balance transfer fee of up to 3.99% of the amount you want to transfer. It’s important to be aware of this fee (which will be added to your overall amount owing) and ensure you are serious about paying off your transferred amount before you incur more debt.
If you have a good credit score and thus have the luxury of being picky, you may want to compare balance offers between cards to see if there is an option that doesn’t charge a transfer fee.
The promotional period
Promo periods vary and generally speaking, the longer the better. Credit card companies usually won’t let you extend the period, so make sure you can pay down the debt in the prescribed time.
The post-promotional period
Your new low interest rate only applies to the debt you transfer. New purchases will be subject to your new card’s usual interest rates, which likely hover around the 20% mark. Any debt you don’t pay off will also be charged interest at the regular interest rate.
How do balance transfer credit cards work?
Once you’ve done your research and found the best balance transfer card for you, you’re ready to apply for the card. The process generally follows these steps:
- When you apply, you’ll need to note how much debt and from what specific credit cards (yes! you can transfer debt from more than just one card), including the account numbers of the cards you want transferred. The amount of debt you can transfer varies depending on things like the issuer and your new card’s credit limit. If you can only transfer an amount that is less than your credit card debt on other cards, be sure to transfer the debt with the highest interest first.
- When you’re approved for the balance transfer credit card, the issuer will contact your creditors and pay off the amount of debt that’s been approved for transfer. The process usually takes approximately two to four weeks. Be diligent about making minimum required payments on your cards until the process is completed to avoid late payment fees.
- Note that you only have a specific limited time to do a balance transfer. Most credit cards require that you take advantage of the transfer promotion within the first 3 months of being a cardholder.
- Be incredibly disciplined about not missing payments on your new card. Many issuers will cancel the promotion and move your debt to a much higher rate if you miss or are even just a day late with a payment. I would recommend setting up automatic minimum payments to ensure you’re never late.
- Pay off the transferred debt before the expiry date. Sadly, all good things must end. Balance transfer promotion always have an expiry date so mark that date on the calendar and do everything humanly possible to pay all your transferred debt off before it becomes subject to the card’s regular rate.
An example
Still unsure whether a credit card balance transfer is right for you? A real-life example can help put the benefits of a balance transfer in perspective.
Say you had a credit card with an annual interest rate of 13.99% and you were carrying a balance of $10,000 for a year (and to make things easier, this model assumes you are making minimum payments that keep the overall balance owing consistent at $10,000). After 12 months you would have paid $1,399 in interest. If you got a credit card with a balance transfer option of 0% for 12 months and a 3% fee, you would pay $300 in transfer fees but nothing in interest for the first year.
As long as you paid down the entire $10,000 during the 12-month promotion period, you would be well ahead. If, however that balance transfer card’s normal interest rate was 20% and you didn’t pay off the transferred debt, and in fact, accumulated more such that your balance was back up to $10,000, you’d be paying $2000 in interest in year two. Overall, you’d eventually pay more than you would have if you had just kept your debt on the original credit card.
Scenario 1: If you just kept your credit card
| Balance | Interest Rate | Interest Paid | Balance Transfer Fee | |
|---|---|---|---|---|
| Year One | $10,000 | 13.99% | $1399 | $0 |
| Year Two | $10,000 | 13.99% | $1399 | $0 |
| Year Three | $10,000 | 13.99% | $1399 | $0 |
| Total | $4197 | $0 |
Grand Total: $4197
Scenario 2: If you did a balance transfer but did not pay off your transferred balance
| Balance | Interest Rate | Interest Paid | Balance Transfer Fee | |
|---|---|---|---|---|
| Promo Year | $10,000 | 0% | $0 | $300 |
| Year Two | $10,000 | 20% | $2000 | |
| Year Three | $10,000 | 20% | $2000 | |
| Total | $4000 | $300 |
Grand Total: $4300
Scenario 3: If you did a balance transfer and paid off your transferred balance
| Balance | Interest Rate | Interest Paid | Balance Transfer Fee | |
|---|---|---|---|---|
| Promo Year | $10,000 | 0% | $0 | $300 |
| Year Two | $0 | 20% | $0 | |
| Year Three | $0 | 20% | $0 | |
| Total | $300 |
Grand Total: $300
This example is a good way of illustrating just how important it is to pay down your debt during the promotional period. Your total costs in Scenario 3 (aside from paying off your balance) would only be $300, which would save you thousands of dollars in interest. However, if you don’t pay off the balance, you may be better off keeping your old credit card if the interest rate is lower than your new card (as illustrated in Scenario 1).
Final word
A balance transfer is a tool that will only work to your advantage if you use it properly and focus as much effort as possible on paying down your transferred debt. Even if you don’t have debt, some people also consider letting others, like close friends or family members, balance transfer onto their credit card. While this can work, it might also leave you with debt you didn’t sign up for, so consider the points we mentioned above before you proceed.
All in all, balance transferring can help consolidate credit card debt and leave you with breathing room when paying it all back, but it can be suffocating if not handled correctly.
