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4 Rules for Balance Transfer Credit Cards

A balance transfer credit card is credit card that’s used to pay off other credit cards.

Unlike making a purchase, which can be done in seconds either at a store or online as many times as you like, doing a balance transfer isn’t as easy. There are specific rules you have to follow when transferring a credit card balance.

The payoff for correctly following the rules is huge, as you can save hundreds of dollars in interest charges. But if you don’t, then you could end up spending even more than you would have if you never transferred your balance in the first place.

Banks make it complicated to understand their rules and fees, but we’re going to make it simple. After reading this, you’ll know exactly how to use a balance transfer card.


Why do banks offer balance transfer cards?

The first question you should ask when getting a balance transfer card is “Why would the bank offer a 0% balance transfer credit card?” How do the credit card companies make money? Isn’t a 0% loan just free money for you?

The reality is that many people that get balance transfer cards don’t follow the rules and get slammed with unnecessary fees and interest charges. The bank then makes up the money they lost by giving them the low interest rate in the first place.

It’s like a game. If you want to beat the bank, then you have to know how to play. When properly used, you can save money. When improperly used, the bank wins.


The rules of balance transfer cards

1.     Always pay it off before the low-interest period ends

One of the ways that banks can make money on 0% balance transfer credit cards is when you aren’t able to pay it off in full by the end of your promotional period.

After your promo period ends, your interest rate will shoot up to 20% or higher, which is a nice payday for the bank.

The larger your balance transfer is, the less likely it is that you’ll be able to pay it off in full.


Should I always transfer as much as possible?

It can be tempting to transfer your whole balances (or even multiple balances) to your new balance transfer card so you can save on interest. But is it always the best idea?

In most cases, it actually is. Even if you know that you won’t be able to pay it off in full by the end of the period, you won’t pay as much interest when you carry a balance this way.

That’s because you would have postponed your interest for a few months, allowing most or all of your payments to go to reducing the principal.

When interest accumulation resumes, your balance will be lower than it would have been if you hadn’t transferred a balance. Even if the rate is slightly higher, it ends up being cheaper.

The exception to this is if you haven’t been paying off as much as you should have been.

Just like a normal credit card, your balance transfer card will have a minimum monthly payment, even if you have a 0% balance transfer card.

If you use the balance transfer card just to postpone making any payments, you’ll actually be much worse off than if you hadn’t transferred.

Every time you make a balance transfer, your new credit card company will tack on a fee. It could be anywhere from 1 – 3% of the balance transferred. So if you transfer $5,000, you’ll have to pay back an additional $50 - $150.

Minimum payments can be quite low on a balance transfer card – so low that if you don’t pay extra, by the time your promo period ends, you wouldn’t have even paid off the transfer fee! In that case, you’d now have even more debt than before and have a higher interest rate!

That’s why it’s so important to commit to paying off as much of your new card as possible. Preferably you would pay it all off, but if not, then make more than the minimum payment.

2.     Never miss a monthly payment

Something hidden in the fine print of balance transfer cards is the ability of the bank to immediately raise your interest rate to normal if you miss a payment.

This is a terrible outcome, because the whole point of getting a balance transfer card is to reduce how much you have to pay. If you miss a payment and the interest shoots back up, you’ll have the full balance PLUS the balance transfer fee charging 20% or more in interest immediately. That’ll totally negate any benefit of doing the transfer in the first place!


3.     Don’t make any purchases on the credit card

Another hidden part of your balance transfer card is how much you’ll pay in interest if you make a purchase?

“But I thought it was a 0% card?” you may ask. And that’s exactly what the bank wants you to think.

You may have a 0% balance transfer card, but that 0% interest ONLY applies to balance transfers. It DOESN’T apply to purchases or cash advances.

So you may think that you’re safe to make purchases and get 0% interest, but you’re wrong. And that can be costly.

Every credit card in Canada has something called an interest-free grace period. You won’t be charged interest if you pay off your credit card statement in full every month, even though the date from a purchase to when you pay it off can be more than 50 days!

But your interest-free grace period only applies if there aren’t any outstanding balances on your credit card. They can take away that interest-free period if you miss a payment, or are just carrying a balance. And guess what? Having a balance transfer card counts as carrying a balance!

That means there’s no interest-free grace period for purchases made with a balance transfer credit card. But it doesn’t stop there.

You may think that you can just pay off the new purchases as soon as you make them, then continue to pay no interest. But what actually happens is quite different.

Balance transfer cards in Canada proportionally dish out your payments. When you only have 1 type of credit on there, like balance transfers, then it doesn’t matter. It also doesn’t matter if you have multiple types (balance transfers, purchases, or cash advances) and you pay the bill in full.

It really matters when you don’t pay the bill in full and have multiple types of credit open.

Imagine you have $4,500 on a balance transfer card at 0% and make a $500 purchase on your card. You immediately pay off the $500 purchase, and then make an additional $500 payment when you get your monthly statement.

As soon as you made that purchase, you opened yourself up to interest charges.

When you made that purchase, your total credit utilization was $5,000. That $500 represented 10% of your total credit owed.

When you made the first $500 payment, the bank will apply it proportionately. Since 10% of your bill was a purchase, 10% of your payment goes towards paying it off, and 90% goes towards the 0% balance transfer.

The next month, you see that you’re charged $15 in interest. Why? Because the remaining $450 from your purchase started accumulating interest the second you bought it.

The second $500 is split the same way. Your total bill was $4,500, of which only 10% went to the purchase and 90% went to the balance transfer.

The ONLY way to stop being charged interest like this is to pay off your balance, including any new purchases, IN FULL. Otherwise you’ll be charged interest every month.


4.     Cut up the card after you’re done

I didn’t say cancel your credit card, just cut it up. Or freeze it. Or put it in a sock drawer. Do something that makes it difficult to use.

Generally, there’s no reason to cancel a credit card with no annual fee. Most credit cards don’t have inactivity fees these days, but even if it did, you could set up a small recurring charge (like Netflix) or use it once a year if you wanted to keep it active.

Having more available credit is typically good for your credit score, but having lots of credit that’s 100% used is bad. You’ll have to pay lots in interest every month, and you’ll hurt your credit score.

Taking out a balance transfer card means you had trouble controlling your spending before. Whether or not it was your fault, or you were forced to, it still shows that having a lot of open credit may not be the best idea. You don’t want to spend yourself right back to the place you were before.

By making it hard or impossible to use, you won’t run into many problems.


Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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