How Credit Card Balance Transfers Work

If you've ever been in credit card debt, you'll know how challenging it can be to get ahead of your interest payments. For this reason, many Canadians consider opting for a credit card balance transfer. If you've never heard of one, read on to learn more.

A credit card balance transfer is when you transfer the outstanding balance owed on one credit card to another card, which typically has a lower rate. The rate is sometimes offered as a special promotion when you sign up for a balance transfer on a new credit card, but not always. When switching to a balance transfer credit card, you’ll be offered a low promotional rate to transfer your balance from your current credit card to a new one. If you have a lot of high-interest debt, a card like this might be worthwhile. But, before you sign up, you’ll want to read the fine print and make sure it’s worth it.

The main reason is to put yourself in a better financial position and get out of credit card debt sooner. The whole idea is to help save yourself money. When you transfer your existing credit card debt from a credit card at a higher interest rate to a card at a lower interest rate, assuming the balance stays the same or declines, you’ll save on interest. But, there are downsides you should be aware of.

With a balance transfer, it’s possible to end up with more debt than when you started. If you’re going to do a credit card balance transfer, it’s important to make yourself a repayment plan and stick with it. That way you can benefit from a balance transfer and pay off your credit card debt even faster.

Balance Transfer Rates

Before agreeing to a credit card balance transfer, the first step will be to find out the interest rate. Often, there’s a promotional balance transfer interest rate and a higher rate that takes effect once the promotional rate ends. You’ll want to ask yourself if you’ll be able to realistically pay off the balance before the time the lower promotional interest rate ends. If the answer is yes, then a balance transfer can be quite beneficial. It’s a lot better to pay 1% or 2% on your credit card balance, instead of 19.99%, which can keep you in the perpetual cycle of late and missed payments.

Balance Transfer Fees

Next, you’ll want to see if there is a balance transfer fee. Some credit cards want to charge you a fee for doing a balance transfer. It might be 1% of your outstanding balance. This might be worth it, but unless you make a plan to pay down your balance, your balance could end up bigger after the balance transfer. Through careful planning, you can avoid this fee.

Balance Transfer Period

The balance transfer period is the length of time you have until the higher interest rate kicks in. Usually, it’s a few months. You’ll want to pay special attention to this and realistically ask yourself: will I be able to pay off my credit card in full by then? If the answer is no, you might want to look for a credit card with a longer balance transfer period. If that’s not possible, you’ll want to sit down and do the math and see if the balance transfer will be worthwhile after the fees. You’ll also want to make sure the interest rate on the credit card you’re transferring your balance to isn’t going to be higher than the interest rate on your existing credit card.

If you’re looking for credit card balance transfer alternatives, here are a few helpful options.

Personal Loans

You could take out a personal loan to pay off your existing debts. This makes the most sense when the interest rate on the personal loan is lower than the rates on the debts that you’re paying off. Personal loans can be helpful because they come with a set payment schedule. You’re required to pay off your debts in a specific period of time.

Mortgage Refinance (Secured Loan)

A first option is to refinance your mortgage. Refinancing your mortgage means taking out a new larger mortgage to pay off your existing debts. You can pay off your credit card debt with mortgage funds or home equity line of credit (HELOC). The benefit of using a mortgage is that it’s usually at a lower rate. The benefit of using a HELOC is that the payment is usually lower. You want to keep both of those things in mind when choosing the right option for you.

Debt Consolidation Loan

A second option is a debt consolidation loan. This is a new loan that you take out to pay off existing loans, which can be worth it if you qualify. The biggest benefit of a debt consolidation loan is that you can pay off your debts sooner and save on interest. The potential downside is that, as mentioned, you could continue to accumulate debt without a proper repayment plan.