Balance transfer credit cards offer a valuable opportunity to consolidate high-interest debts onto a new, low-interest credit card, effectively halting the cycle of compounding debt. Responsibly utilizing credit card balance transfer offers can provide a pathway to managing debt more effectively and kick-starting your financial journey on a positive note.
According to Statistics Canada, Canadian household credit card debt saw a 3.51% increase from June 2023 to October 2023. For many Canadians grappling with debt, exploring a balance transfer credit card could be a prudent step forward. Here’s a roundup of the best balance transfer credit cards available in Canada, along with essential insights to help you begin reducing your monthly credit card payments today.
Balance transfer credit cards offer a convenient method to save substantial amounts on interest charges while clearing off debts.
Consider this scenario: You owe $3,000 on a department store credit card with a 19.99% interest rate. By transferring this debt to the CIBC Select Visa* Card and committing to a $505 monthly repayment, you can eliminate the debt in just 6 months, with no interest charges and only a $30 balance transfer fee. In contrast, sticking to the department store credit card would require 7 months to repay with the same $505 monthly payment, resulting in approximately $186 in interest payments over the repayment period. Opting for the balance transfer would result in savings of $156.
By simply applying for a different credit card and capitalizing on their promotional rate, you can save yourself $156 or more – with the potential for even greater savings for larger balances.
While balance transfer promotions are primarily intended for consolidating credit card debt, some card issuers may permit transfers from loans or lines of credit, providing additional avenues for savings. It’s advisable to confirm with your issuer if such transfers are permissible.
It’s important to note that card issuers typically do not allow balance transfers to accrue rewards points or cash back. Therefore, it’s best not to factor this into your anticipated savings. However, there are exceptions, with certain cards offering both a low-interest balance transfer promotion and the opportunity to earn rewards points or cash back on regular purchases.
Before selecting a balance transfer credit card, it’s essential to thoroughly explore your options and choose the one that best fits your financial needs. Take your time to read reviews, compare rates and promotions, and calculate the potential savings in interest and fees while ensuring responsible debt repayment. Additionally, be sure to review the fine print carefully, as not all balances may be eligible for transfer between institutions.
The primary objective of obtaining a balance transfer credit card is to reduce the cost of carrying your debt, making a lower interest rate highly desirable.
The primary objective is to clear all transferred debt during the low promotional interest rate period, typically lasting between six and nine months, sometimes extending to 10 months or longer. Approximately 40% of inquiries we receive at pertain to extending promotional periods or transferring balances to new cards. While six months may seem sufficient, time passes quickly, so opting for the longest available promotional period provides more repayment time. If the promotion ends before clearing the debt, consider transferring to another balance transfer card, but remember, approval isn’t guaranteed. Maximize the initial promotion and strive to repay as much debt as possible within that timeframe.
Some cards, such as the Scotiabank Value® Visa* Card, maintain relatively low rates even after their balance transfer promotional period concludes. Conversely, other cards promptly increase the interest rate to 19.99% or higher, which can pose financial challenges if the balance remains unpaid. It’s crucial to verify whether the post-promotional term interest rate applies solely to the remaining balance or is retroactively calculated on the total owing since obtaining the card.
Many balance transfer cards impose a one-time balance transfer fee, usually ranging from 1% to 3% per transferred balance. Typically, the transfer fee is added to your balance. For instance, if you transfer $4,000 of credit card debt and incur a 1% balance transfer fee, you’ll be charged $40, and your new transferred balance will reflect as $4,040 on your card.
The balance transfer card you’re interested in may necessitate a minimum annual income, a respectable credit score, and a clean credit standing devoid of ongoing bankruptcies or consumer proposals. Additionally, the card issuer may prohibit you from transferring a balance from one of its own credit cards or those of its subsidiaries.
For example, Tangerine, owned by Scotiabank, may not permit the transfer of a debt owed to its parent company. If you’re unsure about eligibility or if the debt may not be transferable, it’s advisable to check with the bank before applying.
Before finalizing your decision on a balance transfer card, invest time in reading comprehensive reviews of the card. This will help ensure that you’re aware of any potential snags or fine print details that might catch you by surprise later on.
The process of executing a balance transfer typically follows these steps:
Additionally, be cautious with new purchases, as balance transfer credit cards typically offer low interest rates only on transferred balances. New purchases may be subject to higher interest rates. If you plan to make new purchases, ensure the card has a low purchase interest rate or consider closing the card after paying off the balance and opening a different low-interest rate credit card.
Yes and no. Most credit card applications, including those for balance transfer cards, typically involve a hard credit check. These inquiries can temporarily lower your credit score, so it’s advisable not to apply for multiple credit cards within a short timeframe.
However, obtaining a balance transfer card can also positively impact your credit score. It increases your available credit and enhances your credit utilization ratio. Moreover, consistent repayment of the transferred balance demonstrates responsible financial behavior, which can positively influence your credit report over time.
Not everyone qualifies for a balance transfer credit card. However, banks and other financial institutions provide personal loans to individuals seeking to consolidate and repay their debt from various sources. With a personal loan, the lender disburses funds to cover your outstanding debts, allowing you to concentrate on repaying the loan over several years at a stable fixed or variable rate. It’s crucial to be vigilant of lenders offering excessively high, predatory rates, particularly for individuals with limited access to credit. Always review the terms and conditions carefully before proceeding.
When you make a credit card payment, your credit card issuer has the discretion to allocate your payment among the various balances on your card. For instance, you may have balances at different interest rates, such as a balance transfer at 0%, purchases at 19.9%, and cash advances at 24%.
The issuer can allocate your payment to your highest interest rate balance (e.g., the 24% cash advance), your lowest interest rate balance (e.g., the 0% balance transfer), or proportionately based on the size of each balance. Each allocation method carries different cost implications for you, the cardholder.
If your payment goes toward the 0% interest balance, you’ll reduce your principal amount but continue to accrue significant interest on your 24% cash advance.
In Canada, when your credit card account comprises balances with different interest rates, any payment exceeding the minimum due is typically allocated proportionately to these balances. For instance, if you have a $700 balance from purchases at the standard rate and a $300 balance from a 0% promotional cash advance, proportional allocation means 70% of your payment will be applied to the purchase balance and 30% to the cash advance balance.
Unfortunately, with proportional allocation, you can’t specifically target the balance with the highest interest rate. As a result, the high-interest balance persists until the low-interest balance is paid off completely. This can prolong the duration of the high-interest balance, especially if the low-interest balance is substantial.
To mitigate this, focus on paying off the high-interest balance first, ideally through additional payments beyond the minimum due. This approach minimizes the interest accrued and accelerates your debt repayment.
The solution is straightforward: Utilize one credit card exclusively for balance transfers and another low-interest credit card solely for purchases. By segregating your balances, you gain control over how much you allocate toward each debt, enabling you to prioritize repayments effectively. Refer to our compilation of the best low-interest credit cards for suitable options.
The primary incentive for considering a balance transfer is when you hold debt on one or multiple credit cards with higher interest rates and aim to settle it. Transferring your outstanding balance from a higher-interest credit card to one with a lower rate is a prudent decision, potentially resulting in substantial savings—possibly amounting to hundreds or even thousands of dollars, depending on your debt level. However, it’s essential to note a crucial caveat: a balance transfer proves advantageous only if you repay or substantially reduce your transferred balance within the promotional period.
A balance transfer is only effective if you commit to diligently paying off your outstanding credit card debt. Therefore, it’s not a suitable option if you lack a strategy to increase your payments or address reckless spending habits, which would otherwise result in accumulating more debt.
Moreover, you should refrain from opting for a balance transfer if the reduced interest rate merely provides a temporary breathing space that might inadvertently encourage additional spending. For certain individuals, a lower interest rate may create a false sense of debt manageability, prompting them to charge more to their credit cards and exacerbate their financial situation.
Your credit score plays a crucial role in determining your eligibility for a balance transfer. Before proceeding, it’s essential to assess whether your credit score meets the minimum requirements set by many credit card issuers in Canada. You can check your credit score and understand its implications by referring to our ultimate guide to credit scores.
If your credit score falls short of the required threshold, exploring alternative options such as low-interest credit cards might be advisable.
Another crucial factor to consider is the balance transfer fee, typically up to 3.99% of the transferred amount. It’s essential to be mindful of this fee, as it will be added to your overall balance. Ensure your commitment to paying off the transferred amount promptly to prevent accumulating additional debt.
For individuals with a good credit score, it’s advantageous to compare balance transfer offers across different cards. This comparison may unveil options that waive the transfer fee, providing additional savings.
Your new low-interest rate only applies to the debt you transfer. New purchases will be subject to your new card’s standard interest rates, which typically hover around the 20% mark. Any remaining debt will also be charged interest at the regular rate.
Still uncertain whether a credit card balance transfer is suitable for your situation? Let’s consider a real-life scenario to illustrate the benefits of a balance transfer.
Imagine you have a credit card with an annual interest rate of 13.99%, and you’ve been carrying a balance of $10,000 for a year. Assuming you’re making minimum payments to maintain the balance at $10,000, you would have paid $1,399 in interest over the year. Now, if you were to transfer this balance to a credit card offering a 0% interest rate for 12 months with a 3% transfer fee, you’d incur a $300 fee but pay no interest during the promotional period.
If you manage to pay off the entire $10,000 balance within the 12-month promotional period, you’d come out ahead. However, if the balance transfer card’s standard interest rate after the promotional period is 20%, and you fail to pay off the transferred debt, accruing additional debt to bring your balance back to $10,000, you’d end up paying $2,000 in interest in the second year. Ultimately, you could end up paying more than if you had simply retained your debt on the original credit card.
This example highlights the importance of understanding the terms and conditions of a balance transfer offer and being diligent about paying off the transferred debt during the promotional period.
A balance transfer can be a valuable tool if used correctly and with focused efforts to pay down the transferred debt. However, it’s essential to understand that even if you don’t have debt yourself, allowing others, such as close friends or family members, to transfer their balances onto your credit card can have implications. While it may provide temporary relief, it could also result in unexpected debt obligations.
In summary, balance transfers can effectively consolidate credit card debt and provide some breathing room for repayment. Still, they can become overwhelming if not managed carefully and responsibly.
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