Many Canadians have high credit card debt. The prospect of paying off those balances can seem overwhelming. So, when a 0% balance transfer offer comes to your attention, it might be tempting. But how does a balance transfer work exactly? It can be an effective way to pay off debt, if used in combination with other sound financial strategies to stop the bills from rising again.
What Is a Balance Transfer?
When you carry a credit card balance, you pay a high amount in interest and fees every month. If you have multiple cards to keep track of, you may feel like you are forever transferring money to cover off the monthly payments. It can feel like two steps forward and one step back each month. A balance transfer lets you put all of your debt onto one card, which can make you feel more comfortable managing your debt. But more critically, balance transfer offers often give you an opportunity to pay your debt down with a much lower, or even 0% interest rate.
You can apply for a new credit card that offers a balance transfer option. Or, one of your existing credit cards may allow you to request a balance transfer through online banking or via phone. The card company takes care of transferring funds to your other cards, a process that can take anywhere from a few days to a few weeks.
How Much Does a Balance Transfer Cost?
Introductory interest rates for balance transfers run anywhere from 0% to 3%. If you’re currently paying 19.99% on your credit card balances this can save you money. But note the word “introductory.” Typically, the low rate is for the first few months only. After that, if a balance remains, you pay the regular rate on the new card.
Also, balance transfers are often logged as cash advances on the new card. You may not pay a one-time cash advance fee, but you will pay interest from the day the transfer takes place. You don’t have a grace period until your statement is issued.
Your card may also charge a balance transfer fee, which may be a percentage of the amount transferred. It’s important to shop around for the best low balance transfer credit card for your situation and to take notice of any fees or fine print associated with the product. If you do decide to open a new balance transfer card, take advantage of the low-interest period and try to pay down your debt before any introductory offers expire.
What Are the Risks?
Perhaps the biggest risk is falling back into more credit card debt once you have room on your other cards. Also, if you miss or delay payment on the new card, you can lose the benefit of your introductory interest rate. In that case, you might see your interest rate rise to the regular rate on the new card, which may be the same or even higher than it was on the old cards.
Strategies to Reduce Credit Card Debt
A balance transfer is one potential tool to help reduce or eliminate credit card debt. There are several other techniques experts recommend for getting out of debt completely:
- Conduct an overall review of your finances
- Choose a debt repayment strategy: higher interest rate first, or the smallest balance first
- Stop using credit cards for purchases
- Consider a personal loan
For many people, getting out of debt is a long process. It’s common to stumble along the way, and it’s important not to get discouraged. If you are struggling to manage your credit, revisit your plan, get financial counselling, and see if there are other ways to stay on top of your spending.