If you fall behind on your credit card payments, you should consider a balance transfer credit card.
But what is a balance transfer credit card? A balance transfer involves transferring all or part of your debt to another lender. This process is mainly used to consolidate loans or to save on interest.
In simpler terms, you will be using a new card to pay off your old card. For credit cards, you can transfer your existing credit card balance to another credit card. The new credit card will have a lower interest rate or a promotional balance transfer rate.
Essentially, you’ll pay off your credit card debt faster and ease the financial burden of high interest rates. To be successful, you’ll need to pay off as much debt as possible during the promotional period.
You can then potentially save hundreds or even thousands on your existing debts. If you have multiple credit cards in arrears, you can consolidate your debt through a balance transfer by combining all the cards into one. This can benefit you, as you’ll only have to make one monthly payment instead of several.
When considering a balance transfer, there are two options available to Canadians:
If you want to take advantage of the lowest rates, you’ll need to apply for a new credit card, precisely one that offers low introductory balance transfer rates to new customers. Unfortunately, there will be a time limit.
If you’re considering a credit card with only six months’ intro rate and don’t think you’ll be able to pay off your debt in less than a year, consider looking into other options. Be sure to let the lender know how much credit card debt you have, so you can transfer it all. Your lender will then decide how much of the debt can be transferred. If the lender approves an amount less than your total credit card debt, be sure to transfer the debt with the highest interest rate to make the most of the transfer.
Limited-time offers may not be the best choice for you if your introductory period is over and your interest rate changes to a standard balance transfer rate. You may be worse off than before if you fail to pay off your balance transfer during the limited time offer presented by the card. If this happens, it’s best to opt for a card with a low permanent interest rate.
Your balance transfer rate will return to normal if you miss the minimum payment during the promotional period. This rate can be as high as 23%! A promotional balance transfer is best suited if you are disciplined and stick to your monthly payments. Avoid this option if you tend to forget to make your payments on time.
Although you can make purchases with your balance transfer card, the Canadian government strongly recommends that you do not. Most credit card companies will allow you to make the purchase, but 80% of the purchase will be made at the promotional balance transfer rate, and the remaining 20% will be charged at the regular interest rate for the purchase.
Some cards allow you to earn rewards, but they are only given when you make a purchase, not for cash advances or balance transfers. It’s best to forego the rewards for now and concentrate on paying off your balance in full.
You cannot make balance transfers between the same banks. This must be done between two separate lenders. You will have to go to another lender to request a balance transfer.
Unfortunately, there are a few drawbacks that you should be aware of when considering a balance transfer.
While there are drawbacks to balance transfers, they can have a positive impact on your finances in the long run. This temporary solution can save you hundreds of dollars in interest charges over time. It will be worthwhile to remain disciplined throughout this period to pay off your credit card balance faster, ultimately saving you money.
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