One of the biggest rules in personal finance regarding credit cards, is to honor your balance entirely, every single month! However, things happen, some circumstances may prevent full payments to be made, and you can find yourself easily pushed into the credit card debt.
Credit card debt is not easy to deal with, the interest fees continue each day that goes, your debt obligations pile up, and your minimum payments hardly touch the principal. The struggle can be real!
If monthly interest changes won’t let you pay off this debt, you might need to consider using a balance transfer credit card, to help you eradicate your debt once and for all.
What is a balance transfer credit card?
Consumers who want to move the amounts owed to a credit card, with a significantly lower promotional interest rate and better benefits, usually make credit card balance transfers. A balance transfer card is an actual credit card that offers a very low introductory interest rate for an already fixed promotional or introductory period (1.99% for example and six months respectively, for example).
Once the transfer is made, you will only be charged for the low interest rate set during the promotional period. After the latter ends, your card’s interest bounces back to its initial levels, that’s the main reason why you need to pay off most of your debt, if not all of it, before that happens. Balance transfer cards can allow you to consolidate other personal loans and lines of credit as well.
The best balance transfer offers available in Canada vary between 0% (which is very rare) and 3.99%. If used correctly, a balance transfer can allow you to save several hundred dollars in interest payments. Find below what those numbers look like for three different credit cards, paid off over 9 months.
|Credit Card||Balance||Interest rate||Monthly payment||Time to pay off||Interest paid|
|Travel credit card||$1,000||19.99%||$130||9 months||$60.23|
|Rewards credit card||$1,500||21.99%||$180||9 months||$110.57|
|Balance transfer credit card||$2,500||1.99%||$310 ($130 + $180)||9 months||$14.78|
As you can see, taking advantage of a low interest 1.99% offered by balance transfer will allow you to put the same amount of money on your debt each month, while saving up over $150 in the process. That’s how powerful a low interest balance transfer credit card can be!
What’s the catch? Transferring a balance requires carrying a monthly balance (even with a 0% interest rate), which still involves making on-time payments of at least the minimum due on the transfer, and for any new purchases. Fail to do so, and you might end up losing the credit card’s introductory Annual Percentage Rates (APR) on your transferred balances as well as the grace period while suffering from surprise interest charges -and probably penalty APR- on your next acquisitions.
You need to study your options and avoid high interest rates while paying down debt. In case you’re not familiar with it, a balance transfer APR is the annual percentage rate or interest rate charged to balance transfers. This is a different rate from the ones traced on to purchases, cash advances, and foreign transactions; your cardholder agreement lists the different APR for the different types of transactions.
As it is recommended, always read the fine print before making a decision! You might need to consider the following parameters before getting a balance transfer credit card:
- The rate of the Balance Transfer: You need to start by knowing the introductory rate offered, the closer to zero the better. Compared to the standard 19.99% APR, anything between 0% to 3.99% can be worthwhile. You might need to be aware if the card issuer charges a balance transfer fee, which is usually between 1% and 3%.
- Promotional Period: The longer the duration of the interest-free period, the better. This way, you will be allowed to pay off your entire balance during the promotional period if you can. However, the regular interest rate rises back to its initial after right after the end of this period.
- Annual Fees and Other Benefits: Does the balance transfer card have an annual fee? Are the benefits worth the cost if it does? For an informed decision, verify if the card offers any kind of rewards, like extended warranty, travel insurance, cash back, purchase protection, etc.
During the pandemic, credit card companies are assisting cardholders experiencing financial distress. Card issuers encourage struggling cardholders to reach out and ask about options such as lowering their interest rate, deferring payments, or avoiding late fees.
How do balance transfers affect my credit score?
Balance transfers can affect the credit score positively as well as negatively! It depends on several factors; someone with already good credit can be eligible for some of the best balance transfer cards available.
In general, if you follow a successful strategy regarding balance transfer and you end up paying off the amounts you owe on time, your credit score won’t be harmed. Paying your balance transfer bill on time every month can also boost credit because payment history is the key to have a positive impact on your credit score, and you will be eliminating the debt you’re carrying around while building a great payment history.
The amount of credit allowance offered by the issuer of the balance transfer card may determine how much a credit score improves, the higher the amount available, the more improvement possible.
At worst, the credit score won’t be highly impacted because the overall effect is neutral. But – there is always a but when it comes to Finance – a balance transfer consolidation strategy can hurt your credit score in some cases.
Find below some examples:
- If you charge on your other cards and increase your debt instead of getting rid of it, your credit utilization ratio will naturally go up, which means your credit score will eventually decrease.
- In case you miss payments because you can’t afford the monthly minimum requirements for one reason or another, or your debt is too big to handle within the period initially set, it will stain the credit history, decreasing your score.
- Your score will also decrease if you request several lines of credit within a six-month period. Be aware of applying for a balance transfer credit card around the same time you requested other loans and credit cards! Don’t forget that credit card applications are not grouped together, and each application counts as an individual one with its own credit check. This is not the same case as mortgages and auto loans applications for example, because they can get grouped together if they’re within a small window of time, so it doesn’t impact your credit score negatively as you work to find the best deal. Do your homework and choose the best option before you apply! To minimize the potential negative effect on your credit score, only apply for one card.
- The length of credit use isn’t a major factor in credit score calculation and evaluation, but it remains a factor! If you decide to terminate your credit card accounts after the balances’ transfer, it can impact the “age” of your credit history and closing older accounts will cause a decrease in your score. You don’t have to close a credit card just because you eliminated the balance, be strategic about using credit, keep your oldest account open and active, and use it to make a purchase occasionally before paying off the balance in full at the end of the month to skip interest charges. The account will remain in good standing without having debt hanging around.
Pros and Cons of Balance transfers
Credit card balance transfers can be helpful for the right person and scenario, but detrimental otherwise.
Take a step back and evaluate the pros and cons before you ask for a credit card balance transfer, depending on your financial situation! Your credit card must suit your lifestyle.
Advantages of balance transfers
With a credit card balance transfer, you are allowed to combine multiple credit card balances by transferring them to the desired card. Putting all of your credit card debt into one balance through a transfer helps you focus on one payment with one due date, and tackle your debt faster by making single, monthly payments toward the same balance.
Handling one debt is easier to manage several ones, and you won’t have to manage multiple payments and due dates in the case of having multiple credit card balances.
Lower Interest Rates
Credit card balance transfers are mainly interesting because they offer the possibility of saving money on interest. What does it mean?
For instance, by consolidating your debt balances into one, you will improve your interest rate thanks to the credit card balance transfer. Many transfers also offer low introductory interest rates that can go all the way down to 0% APR during the first year, which can help you focus more your payments on your principal rather than interest.
If you can, do your best to pay off your debt before the introductory interest rate period lapses, because it will allow you to save on interest charges.
Move your debt to a different credit card
If you feel trapped with your current credit cards, or you are dealing with high interest rates and terms that don’t suit your needs anymore, you can always move your debt to a credit card that has a lower interest rate and more favorable terms (depending on your approved card), even a balance transfer card offering you rewards exists.
Nevertheless, wait until your transferred balance is completely paid off before you take on new credit card debt.
Disadvantages of balance transfers
While credit card balance transfers help individuals save significant amounts of money in many ways, it’s still crucial to identify and stay away from terms and details that may hold you back in the future.
Make sure you already have a clear plan on how you can pay off your debt with a credit card balance transfer, because it may cost you otherwise.
Balance transfer fee
Most good things are anything but free, which is the case for balance transfers!
Balance transfer fees can be charged any time you move one credit card balance to another, and these fees need to be considered before deciding whether you should transfer any balances or not. Consider that added cost before you transfer your balance to make sure you’re still saving money. Often between 3% and 5% of your transfer balance, this fee must be considered and evaluated before deciding to transfer any balances; for example, if you want to transfer a balance of $10,000 to another credit card, and the balance transfer fee is 2%, you will need to pay $200 upfront.
There are, however, some balance transfer cards that may waive this transfer fee if you complete your balance transaction within an already set period.
The low interest rate is for a limited time
While a low, introductory interest rate is an advantage of a credit card balance transfer, it can be a disadvantage because it doesn’t last forever. Balance transfer cards may offer a 0% intro APR, but only for a specific amount of time, anywhere from 6 to 21 months.
That means in case you’re using this card to pay off your debt, you should be aware of the expiration date of the promotional period, and at what level the APR will be after that.
You may not be eligible
To qualify for a credit card balance transfer, you typically need a good credit score. If not, you can still be considered but with a higher interest rate! which can make you question and reconsider the credit card balance transfer option altogether.
Replacing current debt with more debt
If you’re looking for a balance transfer, you must be hoping to get back on track, pay off your debt, and save money on interest. Credit card balance transfer agreements seduce customers with low interest rates and minimal fees in the beginning, but if you haven’t resolved the source and origin of the issue, having another credit card could easily lead to more debt.
Be conscious of the temptation to make more purchases with the new card’s appealing interest rates, and if you have chosen this method as a way to buy more items, you will end up with more debt than before!
Balance transfer fee explained
Intuitively, the term refers to the amount of money charged to transfer existing debt from one financial institution to another, and this fee -usually a percentage of the total amount- is usually charged by credit card companies when balances are moved from one card to another. New customers may be offered no to low balance transfer fees as introductory offers.
As a cardholder, you should know all the fees and costs involved, and you’re the only one responsible for any charges that may occur, balance transfer fees, interests on outstanding balances, late payment fees, over-limit fees, etc.
If you want to initiate a balance transfer transaction, you need to contact the card company to where the balance will be transferred. You will be asked to share the following details:
- your name
- the amount transferred
- your card’s account number
As mentioned before, customers often use balance transfers to move high interest debt to cards with lower interest rates, especially when there is an introductory offer involved. However, balance transfer checks can also be used for transfers or other purchases.
For example, a credit card balance of $10,000 at a 15% interest rate results in an annual interest expense of $1,500. If the credit card issuer offers a promotional interest rate of 2% for an introductory period of 12 months, with a balance transfer fee of 1%, and the deal ends up being accepted, the total cost of moving the entire amount will be around $300 (the transfer fee of $100 plus interest payments of $200). This way, $1,200 can be saved over the year.
Steps you need to come out ahead with a Balance Transfer
In order to make the most out of a credit card balance transfer, make sure to consider the following steps:
- Can You Qualify? Check your credit score to ensure you qualify. You risk higher interest rates with a low credit score (less than 560), even if you manage to qualify eventually.
- Review your Finances: assess your current financial situation before deciding to do a balance transfer and ask yourself the following questions: how much credit card debt you need to be transferred? What’s your current interest rate(s) and what will the transfer card interest rate be? How long do you need to pay off the balance?
- Don’t forget to read the Fine Print: Always pay attention to the terms and conditions of your credit card balance transfer agreement, because some transfers –if not all- have hidden fees, lower credit limits and card restrictions, as well as and higher interest rates on new purchases.
- Pay off your debt: You need to have all of your information ready for your application process, including your personal information, bank account information, and the amount of debt you are looking to transfer. Once approved, your old balance will be added to the new credit card (including the balance transfer fee).
- Pay on time: If it hasn’t been stressed enough, make sure you keep track of your history payments and pay on time. Late payments will compromise your low introductory rate.
How to choose the right credit card for a balance transfer?
Before applying for a balance transfer, try to keep an eye on:
- Promotions: If you want to pay your debt off rapidly, search for promotions; the lower the interest rate, the better!
- Promotional period: Verify if the offer in front of you is long enough for you to be able to pay off the balance. Once the promotion ends, the interest rate goes back to normal, and you will need to pay higher interest rates.
- Card issuer: You can’t transfer a balance to a card that’s from your same issuer. Do your research and look for the right one for you.
- Credit limit: The amount you are willing to transfer depends on the card you’re moving your debt to. For some cards in Canada, the maximum amount is the actual card’s credit limit, while it can only be 50% for other cards.
- Credit score: Your credit history will guarantee your qualification for the best balance transfer offers.
- No interest-free grace period: Unless you managed to use a 0% interest rate offer, you will be charged interest right after the balance transfer is posted to your account
- New purchases: The promotional rate agreed upon only applies to the balance you transferred, which means new purchases equal higher rates. Any payments you decide to make will go toward your balance transfer first. This means you will be charged on new purchases, which will keep adding up until you pay off your entire balance transfer
Before applying for a credit card balance transfer, find a plan that will help you pay your debt as soon as possible. Remember these three things; balance transfer fee, interest rate, and annual fee (always aim for the lowest).
To sum up, keep in mind that credit card companies make great offers to new and valued customers, like low-percentage introductory or teaser interest rates, which encourages new consumers to apply for cards, or to existing customers with good history track to transfer balances to them.
You are advised to look carefully at the terms before going through with an offer; the teaser rate and how long it lasts are two important things to consider.