Balance transfer credit cards can be a powerful tool for Canadians looking to manage high-interest credit card debt. By shifting your balance to a card with a lower interest rate, you can potentially save on interest payments and pay off debt faster. However, like any financial tool, balance transfer credit cards come with their own set of advantages and disadvantages.
This article dives deep into balance transfer credit cards in Canada, including how they work, the pros and cons, and when it might be the right time for you to make the move.
What Is a Balance Transfer?
A balance transfer involves moving an outstanding balance from one credit card to another, typically one with a lower interest rate. The primary goal is to reduce the interest you are paying on your debt, making it easier to pay off the principal. Many balance transfer offers in Canada feature introductory rates as low as 0% for a set period, usually between 6 to 12 months.
Example of a Balance Transfer:
| Original Credit Card | Balance Transfer Card |
|---|---|
| Interest Rate: 19.99% | Interest Rate: 0% (6 months) |
| Balance: $5,000 | Balance: $5,000 |
| Monthly Payment: $200 | Monthly Payment: $200 |
| Total Interest Paid (6 months): $300 | Total Interest Paid (6 months): $0 |
In this scenario, the balance transfer card saves you $300 in interest payments over six months.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is designed specifically for moving balances from higher-interest cards. These cards typically offer a low or even 0% introductory interest rate for a limited time, which gives you a grace period to pay off your debt without accumulating high-interest charges. After the introductory period, the interest rate will revert to the card’s standard rate.
Common Features of Balance Transfer Credit Cards:
| Feature | Description |
|---|---|
| Introductory Rate | 0% to 3.99% for 6-12 months |
| Balance Transfer Fee | Typically 1% to 3% of the transferred amount |
| Standard Interest Rate | After the intro period, 19.99% or higher |
| Credit Limit | Varies by card and your credit profile |
| Payment Terms | Must pay at least the minimum payment each month |
Will a Balance Transfer Save You Money?
Yes, a balance transfer can save you money—but only if used correctly. The amount you save depends on how much debt you have, the interest rates involved, and how long you can pay off your balance within the low or 0% interest period.
Example Savings Calculation:
| Original Credit Card | Balance Transfer Card |
|---|---|
| Balance: $7,000 | Balance: $7,000 |
| Interest Rate: 20% | Introductory Rate: 0% (6 months) |
| Monthly Payment: $250 | Monthly Payment: $250 |
| Total Interest (6 months): $407 | Total Interest (6 months): $0 |
In this case, you save $407 in interest payments by transferring your balance to a 0% balance transfer card and paying off your debt within six months.
Pros of a 0% Balance Transfer
1. Interest Savings
By transferring your balance to a card with 0% interest, you eliminate the monthly interest fees during the introductory period. This can save you hundreds or even thousands of dollars, depending on your balance.
2. Faster Debt Repayment
Since more of your monthly payments go toward the principal (and not interest), you can pay off your debt faster. For example, if you pay $500 monthly on a $5,000 balance at 0% interest, you can pay it off in 10 months.
3. Debt Consolidation
A balance transfer allows you to consolidate multiple high-interest debts into one manageable payment. This makes it easier to track your payments and stay on top of your financial obligations.
4. Improved Cash Flow
With lower monthly payments and no interest to worry about, you free up cash for other financial priorities, such as building savings or investing.
Pros of 0% Balance Transfer:
| Benefit | Description |
|---|---|
| 0% Interest | No interest payments during the promotional period |
| Faster Debt Reduction | Pay off debt quicker without high interest |
| Simplified Payments | Consolidate multiple debts into one |
| Improved Credit Score | Paying down debt improves credit utilization ratio |
Cons of a Balance Transfer
1. Balance Transfer Fees
Most balance transfer credit cards charge a transfer fee, usually between 1% and 3% of the transferred amount. For example, a $5,000 transfer with a 3% fee would cost you $150 upfront.
2. Limited Introductory Period
The 0% or low-interest rate is only available for a limited time—typically between 6 and 12 months. Once the intro period ends, the interest rate jumps to the standard rate, often as high as 19.99%.
3. Temptation to Accumulate More Debt
If you’re not careful, a balance transfer can give you a false sense of financial freedom. The temptation to use your original credit cards again is high, and if you do, you could end up with even more debt.
4. Potential Impact on Credit Score
When you apply for a new balance transfer credit card, a hard inquiry is made on your credit report, which can temporarily lower your credit score. Additionally, if you close old credit accounts, your credit utilization ratio could increase, hurting your score.
Cons of Balance Transfer:
| Drawback | Description |
|---|---|
| Transfer Fees | 1% to 3% of the transferred balance |
| Short Introductory Period | 0% interest lasts only 6 to 12 months |
| High Standard Rates | After the intro period, rates often exceed 19% |
| Risk of Accumulating Debt | Easy access to new credit can tempt overspending |
When Should I Transfer My Credit Card Balances?
Consider a balance transfer if:
- You have high-interest debt and can’t afford the interest payments.
- You can pay off your debt within the low or 0% introductory period.
- You’re disciplined enough not to accumulate new debt during the transfer period.
When to Avoid a Balance Transfer:
- If you won’t be able to pay off the debt before the introductory period ends.
- If the balance transfer fee negates the interest savings.
- If your credit score will be negatively impacted by the new application.
Example Decision Table:
| Scenario | Should You Transfer? |
|---|---|
| High-interest debt, can pay off in 6 months | Yes |
| High-interest debt, can’t pay off in 12 months | No |
| Low-interest debt, no balance transfer fee | Yes |
| Poor credit score, new inquiry could hurt | No |
Frequently Asked Questions (FAQs)
1. What happens after the introductory period?
After the introductory period, the interest rate reverts to the card’s standard rate, typically around 19.99%. It’s crucial to pay off as much of your balance as possible before this happens.
2. Will transferring my balance affect my credit score?
Yes, applying for a new credit card involves a hard inquiry, which can temporarily lower your credit score. However, paying off debt with a balance transfer can improve your score in the long run by reducing your credit utilization ratio.
3. What if I don’t pay off the balance during the 0% period?
If you don’t pay off the full balance during the introductory period, the remaining balance will accrue interest at the card’s standard rate.
4. Can I transfer balances from multiple credit cards?
Yes, many balance transfer cards allow you to consolidate multiple debts onto one card. Just be mindful of the credit limit on the new card and transfer fees.
5. Are balance transfer offers available for other types of debt?
While most balance transfer offers are for credit card debt, some cards allow transfers from personal loans or lines of credit. Check with your provider for eligibility. Read more here
