A balance transfer credit card is a credit card that is used to pay off other credit cards.
If that sounds a bit confusing, hold on.
All credit cards have an interest rate. This interest only kicks in after a grace period (such as 21 days) after the payment date of the card. If you’re using your credit card responsibly, and also don’t need to go into debt for an expense you weren’t prepared for, then you already pay off your credit card on time every month, resulting in no interest payments at all. This is the best way to use your card.
Unfortunately, many Canadians don’t do this. The average Canadian credit card balance per user is $4094, meaning that many Canadians are carrying a balance month-to-month. When you aren’t able to pay off your card in full is when you start accumulating interest fees. 19.99% is a very common interest rate for rewards card, but there are low interest rate credit cards as well. As that’s an annual percentage rate (APR), that doesn’t mean that a $1000 purchase turns into a $1199.90 balance at the end of the month. Instead, the interest payment would be roughly $16.66 – 1/12th of the APR.
If you only make the minimum payments on a $1000 balance (assuming no more purchases are made on the card) it could take several years and thousands of dollars to pay off, all thanks to interest.
What to do if you’re carrying a balance
If you find yourself with a sizable credit card debt and struggle making payments, a low balance transfer credit card could become a lifesaver.
A balance transfer credit card allows you to move your debt from another card at a much lower interest rate. A card like the CIBC Dividend Visa Card has a balance transfer rate of 0% for 10 months, meaning that after you move your debt over you won’t pay any interest on it for a full year. This allows 100% of your monthly payment to go directly to paying down the principal.
To put it into perspective, paying off $1000 over a year at 0% interest means monthly payments of $83.33 and cost $0 in interest. If you made payments of $83.33 on a card with 19.99% interest, it would take you 14 months and cost $125 in interest.
The downside to a balance transfer card is if your debt is too high to pay off within the promotional low-interest period. The same CIBC card has an interest rate of 22.99% for balance transfers after a year.
Another balance transfer card like the Scotiabank Value Visa has a balance transfer rate of 0.99% for the first 6 months, which is about half the length of the CIBC card, but has an interest rate of 12.99%, so you can still end up saving more in the long run, even though the super low interest period isn’t as long.
Pros and Cons of Balance Transfer Cards
To break it down, here are the pros and cons of balance transfer cards:
· Can have interest rates as low as 0%, meaning huge savings
· More of the monthly payment goes towards the principal, meaning that debt is reduced more quickly
· Are easier to apply for than a personal loan
· Can still be used as a normal credit card for everyday or online purchases
· Interest rates as high as or higher than other cards after the promotional period ends
· No rewards (other than the money you save on interest)
· Require you to be approved when you’re already in debt, meaning if you have a balance that’s too high you could not qualify
· Must pay a small percentage on top of the balance when transferring, such as 1 – 3%
If you want to be free of debt sooner, balance transfer cards can help alleviate the burden of rapidly accruing interest, so long as you properly take advantage of the time it gives you.