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 will be able to transfer your existing credit card balance to another credit card. The new credit card will have a lowerinterest rate or a promotional balance transfer rate.
Essentially, you pay off your credit card debt faster and ease the financial burden of high interest rates. To be successful, you will need to pay off as much debt as possible during the promotion 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 be advantageous for you, as you will only make one monthly payment instead of several.
When considering a balance transfer, there are two options available to Canadians:
If you want the lowest rates, you’ll need to apply for a new credit card, specifically 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 of intro rate and you don’t think you’ll be able to pay off your debt in less than a year, consider looking for other available options. Be sure to let the lender know how much credit card debt you have so you can transfer all of it. Your lender will then decide how much of the debt can be transferred. If the lender approves less than the total amount of your credit card debt, be sure to transfer the debt with the highest interest 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 is best to choose 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 reach 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 at the promotional balance transfer rate, and the remaining 20% will be charged at the normal interest rate of 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 forgo the rewards for now and focus 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 need 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 worth your while to stay disciplined throughout this period to pay off your credit card balance faster, which will ultimately save you money.
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