Have you been toying with the idea of a balance transfer? For those not in the know, a balance transfer is an opportunity to transfer all or part of your credit card balance to a brand new card offering low-interest or zero-interest for a limited promotional period. The benefit to you is that your payments can finally start making a difference to your bottom line since little or no interest is being charged.
Sounds great, right? So why doesn't everyone do this? Maybe because it seems too good to be true? Well, it’s real and you can try it—but there are some things you should think about first before taking this step, and the most important questions revolve around human behaviour and discipline.
7 Things to Consider When Transferring Balances
1. Try asking your current credit card company for 0% interest first.
You’re already doing business with them, so it doesn’t hurt to ask. Your credit card company may not want to lose your business, so give them the first crack at helping you. Think of it like price-matching at the grocery store and ask them if they will match the 0% that you are currently being offered by the competition. If they say okay, no need to move money around; problem solved and it’s a win for you. Even if they agree to reduce the interest only to 5%, you may still want to consider it. This is still a big win for you, especially if it’s a permanent interest rate change.
2. Don't do it because you think it will help your credit score.
There is no way you can predict how your credit score will change following a balance transfer. Julie Kuzmic, Director of Consumer Advocacy at Equifax Canada, recently spoke at our Professional Development Day event, helping to launch our 12th annual Credit Education Week. She explained just how complicated credit scoring systems can be.
According to Julie, there are multiple scoring algorithms that are statistically-derived, based on generalities and performance similarities. To improve predictability of future behaviour (a.k.a. level of risk), credit bureaus create multiple sub-groups that look at past credit behaviour. Depending on the sub-group you’re in, any action you take may cause your credit score to drop, increase, or remain the same, while for someone else it can be totally different. This is because the scoring model takes into account your own unique credit history to generate a new credit score.
While there is a lot we can learn about how a credit score is generally calculated, it’s impossible to predict a positive or negative change in your credit score with any type of certainty. So, don’t let the hope of an improved credit score be your sole reason for choosing to do a balance transfer; do it because you feel it will put you in a better financial place.
3. Find out about the cost of transferring your balance.
Typically, you will need to pay anywhere from 1% to 5% of the balance you are transferring. If you are transferring $5,000 to another card, at a 1% transfer cost, you will have to pay $50. Not too bad if you’re going to save on interest charges, but read on—there is an important warning that comes along with these savings.
4. Ask yourself if you will be able to pay off the entire balance by the end of the promotional period.
This is critically important because if you do not manage to pay off the entire balance by the end of the special-rate promotional period, you will have to pay back the remaining balance at a much higher rate, sometimes as high as 24.99%.
Of course, if you see the deadline looming, you can always look at doing another balance transfer, but you have to ask yourself: a) will you remember to do this, and b) will you be approved again? Credit card companies function with the hope that once they have you as a customer, you will end up staying with them. They are depending on you getting too busy with life and forgetting to take action on the new higher interest rate. Remember, the credit card company is not trying to do you any favours—their goal is to keep you on board, long after the promotional period is over, paying a lot of interest for months or even years.
5. What will you do with the other credit card(s) after the balance transfer?
These card will now have zero balances, so will you close them or keep them open? While it’s true that having long-standing credit is more favourable than having new credit with little history on your credit report, that won’t help you if you are tempted to use those cards again. If you transfer your balance(s) to another card at 0% but then use or max out the original card(s), how has the entire process helped you? Hint: It hasn’t.
This is where human behaviour and discipline have far more importance and power than anything you may know about your credit rating or credit score. In the end, the goals is for your overall debt level to go down. If you know without question that you will not use the “old” card(s) again, then the balance transfer may work. If, however, you’re not sure if you’ll have enough willpower to resist the temptation of using the “old” cards, please don’t do it. It may be best to leave things as-is and look at other options.
6. Do you plan to make new purchases with the new card?
If so, keep in mind that charges made to the brand new credit card will not be included under the 0% interest rate umbrella. They will be subject to the usual high interest rate charged by credit cards. Once again, you will have to be quite disciplined with this card. Ideally, you will want to transfer your balance and only apply consistent payments to the card with the intention of seeing your balance go down. (And not add additional purchases!)
Ask yourself: What is the ultimate win for you? Is it simply to get a 0% interest rate or is it to see your balance finally go down? If your goal is zero debt, then you should not be using the new card for new purchases.
7. Have you considered every method of securing 0% interest?
You might have been offered a balance transfer by a credit card company, but that doesn’t mean it's the only option or even the best option for you. You will probably need a fairly good credit rating to be approved for a balance transfer. Perhaps a debt consolidation loan would be better for you or maybe a well-planned snowball/avalanche repayment plan you can do on your own would be more appropriate. A quick phone call with one of our certified credit counsellors will help guide you in the right direction. You may also want to look into Credit Canada's Debt Consolidation Program, where we negotiate with your creditors on your behalf to either reduce or completely stop the interest on your debts, even if your credit rating is a bit bruised.
In the end, you need to choose the option that works best for you. A 0% interest rate is fantastic but it will not make your balances go down; it simply provides a favourable environment to pay down your debt. Therefore, do whatever you can to secure a 0% or low interest rate. Then once you’ve done that, make all of your payments on time every single month and success will be within your reach.