Credit Card: Should You Consider A Balance Transfer?

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 with overdue payments, 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.

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 perform balance transfers within the same bank. 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.

• Your credit score may be affected – Your credit score is affected by balance transfers every time you apply for a new credit card account. Your credit rating will also be affected if your credit card debt is greater than 30% of the credit limit. Your credit score may decrease as you make timely payments on your outstanding balance.
• You risk taking on more debt – You’ll get more credit once your balance transfer is successful, and you may end up using your old credit card again to make purchases. It would be helpful for you to remain disciplined to avoid any additional debt. If you’re feeling too tempted, consider closing your old credit card

For more tips that can help you eliminate debt, read our guides :

• How can you eliminate credit card debt in Canada?
• How to pay off your debts and improve your financial situation

Performing a balance transfer is a relatively straightforward process, but it requires following a few essential steps to maximize the benefits of the operation and avoid potential pitfalls.

1. Compare available offers: before choosing a card, compare promotional rates, offer duration and transfer fees (often between 1% and 3% of the amount). Also make sure the card is from another issuer, as transfers within the same bank are generally not permitted.
2. Apply for a credit card online: for greater speed and simplicity, apply online. Many institutions offer instant approvals, so you can quickly initiate your balance transfer.
3. Transfer your balance and adjust your payments: once approved, provide your new bank with the details of your old card (amount and issuer). The transfer may take a few days. Then be sure to keep up your monthly payments to take full advantage of the promotional rate.
4. Plan the repayment: divide the transferred balance by the duration of the promotion to repay it before it expires. Avoid using the new card for purchases to avoid higher interest rates.

For more tips, read our guide to how credit card balance transfers work.

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.