A balance transfer can be a beautiful thing. But just as roses have their thorns, these great-looking offers can hurt you too.
First things first: What exactly is a balance transfer offer? This is when a new credit card offer invites you to move the balance or balances off some or all of your credit cards over to this new card at a low interest rate if you sign up—sometimes, it may even be a 0% interest rate. And it’s not always a new card; if you have an existing credit account in very good standing, they may occasionally offer to do the same.
For those of us wanting to be debt-free and struggling with high-interest cards, a balance transfer looks great at a glance! Who wouldn’t want to turn 20% into 2%? They might even make it more tempting by sending you blank cheques. Even if you don’t use cheques anymore, a blank one is exciting! Simply fill in the amount you want to pay on an existing, high-interest rate credit card, send it in, and voila! The money has been transferred to your new card, or an existing one at a lower interest rate. But most offers have caveats, so it’s important to always read the terms and conditions before you make a transfer.
5 Balance Transfer Tricks to Watch For
1. Know When the Low Interest Rate Ends
Many balance transfers only offer their great low rate for a limited time. And after that period ends, the rate goes up, and it might even be more than what you were paying on the other cards! It can work out fine if you clear the balance before the rate increases, but if you don’t, you may find yourself back in the credit cycle, and in worse shape than you were before.
2. Check Transaction Types That Apply
While we never recommend cash advances due to their high fees, some people will use them anyway and think that the low interest rate on their balance transfer applies to ATMs as well. More times than not, the balance transfer interest rate is only for purchases. And the lowered interest fee may also only apply within Canada, so if you frequently travel out of the country and use the card, you’ll be subjected to higher interest rates.
3. Understand the Fees
Kudos to you if you’ve found a balance transfer without fees—that’s like the unicorn of offers. There is almost always a fee attached; it may be a set amount regardless of the transfer, or it could be a percentage of the amount you’re transferring. Sometimes the fee is worth it—the money you save thanks to the lower interest rate is more than the fee amount—other times it's not. This is where you need to do some number crunching.
4. Look for Late Payment Clauses
If you’re prone to missing payments, your low introductory transfer rate may disappear the moment you fail to pay the piper, and it could increase to an amount that’s even greater than what you currently pay on your cards. (We always recommend setting up automatic payments or reminders on your phone to ensure you don’t miss a payment.)
5. Urgent Response Requirements
Many credit card companies don’t expect you to do your homework—they want you to act fast without thinking. That’s why they’ll make it easy to go online and make the switch, or fill out the aforementioned cheques and send ‘em in. So make sure the offer ultimately works in your best interest before making your move, and if anything about the terms and conditions causes you to raise an eyebrow, call before you commit to get the answers you deserve (and in writing!). If it’s a legitimate opportunity, they’ll take the time to answer your questions.
There are a few other things you can do when determining whether a balance transfer opportunity is right for you. First, check with The Financial Consumer Agency of Canada (FCAC). The site has a Credit Card Comparison Tool that can assist you in finding the right card for your needs. This tool factors in interest rate, annual fees, and payments. If the card offering you a balance transfer is nowhere to be found, this may be cause for pause.
Also, if you do make a balance transfer, be sure to stop using the card(s) you transferred the balance from. If you continue to use them, it will only lead you into deeper financial difficulties. I recommend simply putting the cards away—lock them up if you have to! But you probably don’t want to close them, as that could actually lower your credit score. Leave them open, but leave them untouched!
Alternatives to Credit Card Balance Transfers
Transferring balances can become a game—move this here, save that; move that there; save this. But like most games, eventually you may lose. Instead, you'll want to establish a spending plan so you won’t have to rely on credit cards or balance transfers to meet your expenses; after all, you can’t pay them off if you continue to use them. See if you can free up some funds by using our Budget Calculator and use them to pay the balances off sooner—our Debt Calculator tool can help motivate you to do this!
You may also want to speak with your bank or credit union to see if you qualify for a low interest consolidation loan. This way you will have a set interest rate, as well as a set monthly payment; but again, it’s important to remember not to continue using the credit cards.
And if you don’t have the credit score, assets, or income to qualify for a consolidation loan, you might want to book a free counselling session with one of our qualified credit counsellors to explore your other options. We may be able to enroll you into a Debt Consolidation Program (DCP) to help you repay your debts in an orderly and timely manner at a reduced interest rate. You can learn more about a DCP by giving us a call at 1.800.267.2272. And if you book a free counselling session with one of our counsellors, we can answer any questions you have about balance transfers, loans, money management, or DCP opportunities. It’s all free, and it’s completely confidential.