When to Consider a Balance Transfer in Canada?

What Is a Balance Transfer?

A balance transfer involves moving an existing debt to a new credit card. In exchange, the issuer may offer a promotional interest rate for a limited period.

For example, you could transfer a $5,000 balance from a card at 20.99% to a card at 0% or a low rate for several months. This is what the CIBC Select Visa* Card and the True Line Mastercard^® Credit Card offer.

This way, a larger portion of your payments goes toward paying down the principal rather than interest.

When to Consider a Balance Transfer

A balance transfer can offer real benefits, but mainly in specific situations. Before applying, you need to review your current debt, your monthly budget, and your repayment capacity. When the conditions are right, this strategy can reduce your interest charges and accelerate your return to balance.

You Are Paying a Very High Rate

If your current card charges a high interest rate, a large portion of your payments often goes toward interest. The principal therefore decreases more slowly.

In this situation, transferring the balance to a promotional offer can free up part of your monthly payment. You then pay down more of the actual debt.

You Can Pay It Off in a Few Months

A balance transfer is often more effective when you can pay off the amount during the promotional period. This allows you to take full advantage of the reduced rate.

For example, if you can make consistent and disciplined monthly payments, you limit the risk of carrying a balance after the promotion.

Your Finances Are Stable

A stable income and a realistic budget increase the chances of success. You can then plan fixed payments without relying on credit for everyday expenses.

Conversely, if your income varies significantly, it may be more difficult to stick to your repayment schedule.

You Have a Good Credit Score

A good credit score can facilitate approval and improve the terms offered. This may include a better limit or a more attractive promotional rate.

Therefore, if your file is strong, you will generally have more options to compare.

When It's Better to Avoid This Strategy

Even if the offer seems attractive, a balance transfer is not always the best answer. In some cases, it may only move the problem without solving it. It is therefore important to evaluate your credit habits before proceeding.

For example, if:

• You continue to accumulate debt: you risk doubling the problem.
• You can only pay the minimum: the promotion could end before full repayment.
• The fees are too high: some offers require transfer fees, often between 1% and 3% of the amount transferred.
• Your credit is weakened: if your file is weaker, approval may be difficult or less advantageous.

How Much Can You Save?

Let’s take a simple example:

• Current balance: $5,000
• Current rate: 20.99%
• Transfer offer: 0% for 10 months
• Transfer fee: 3%

The fees would be $150. However, the interest avoided could exceed this amount depending on your repayment pace.

Therefore, even with fees, the transaction can remain beneficial. Always do the calculation before adopting this strategy.

Balance Transfer or Personal Loan?

Both options are often used to consolidate debt, but they work differently.

A personal loan may be suitable if you need more time or a structured payment. A balance transfer may be suitable if you can repay quickly.

Balance Transfer or Line of Credit?

Moving credit card debt to a personal line of credit is another common way to lower your interest. A line of credit usually has a lower rate than a credit card, but it works differently from a balance transfer.

According to the Financial Consumer Agency of Canada, with a line of credit, you:

• Pay interest only on what you borrow: the unused part of your limit costs nothing.
• Normally have a variable rate: your cost goes up if rates rise.
• Often make a minimum payment that covers only the interest: paying down the principal is up to you.

Here is a simplified example on a $20,000 credit card balance, with illustrative rates and one month of interest:

• Credit card at 21%: about $350 in interest
• Line of credit at 10%: about $167 in interest
• Difference: about $183 less per month, before any fees

A line of credit has no promotional period to watch. However, the saving only lasts if you set a fixed payment above the interest and stop using the card you just paid off. Otherwise, you could end up with a new card balance on top of the line of credit balance.

A 0% balance transfer can cost less over a short period, as long as you repay before the promotion ends. A line of credit may better suit a larger balance that will take longer to repay.

Fees to Check Before Accepting

Before submitting an application, review these elements:

• Balance transfer fee
• Duration of promotional rate
• Regular rate after promotion
• Minimum payment required
• Penalty for late payment
• Credit limit granted

Then, compare several options before deciding.

Balance Transfer – Credit Cards to Consider

Some Canadian cards periodically offer balance transfer promotions:

Among rewards cards, the Tangerine^® Rewards World Elite^®* Mastercard^®* offers a 1.95% promotional rate for 6 statement periods on balance transfers made within 30 days of account opening. Tangerine's disclosure statement sets a fee of 3% of the amount transferred (minimum $5), which does not apply to Quebec residents. Another plus for a Quebec household: once the debt is paid off, the card's Scene+ points can be redeemed at the checkout at IGA, at 1,000 points for $10 off your groceries.

Conclusion

When to consider a balance transfer depends primarily on your financial situation and your ability to repay quickly. This strategy can be effective for reducing the cost of your credit card debt in Canada, especially if you’re currently paying a high interest rate.

However, it’s not an automatic solution. If you continue to use your credit card without changing your habits, or if you only pay the minimum, the savings you achieve can quickly disappear once the promotional period ends.

Therefore, before making a decision, you need to analyze your repayment capacity, the associated fees, and the duration of the available offer. These three elements are essential to determine whether the transaction is truly advantageous.

In summary, a balance transfer should be used as a temporary tool to accelerate debt repayment, not as a permanent solution to indebtedness.

When to Consider a Balance Transfer – FAQ