September 26, 2024
A balance transfer credit card can help some people pay off their debt, but they come with some serious drawbacks. We look at the pros and cons of them here.
Canadians have a lot of credit card debt. Each of us is carrying about $4,000 in debt on our credit cards right now, according to a report by TransUnion from May 2024. That’s a worrying number when you consider the high interest rates that make paying credit cards off harder and more costly than many other forms of debt.
Balance transfer cards have become a way for many to cope with their credit card debt and get a lower interest rate to help them reduce their total balance, but these cards also come with many drawbacks. To know if a balance transfer credit card is a good idea for your situation, you need to understand the pros and cons.
A balance transfer credit card allows you to transfer the outstanding balance from one or more existing credit cards to the new card.
Balance transfer cards offer lower interest rates than a traditional credit card for a specified period. This can mean an interest rate as low as 0% on some cards; in these cases, it means that any money you pay goes towards the principal of your debt, not interest payments.
The length of time that this lower interest rate applies varies from card to card; it can be a few months, or it may last for a year. If you’re looking to get a balance transfer card, it’s crucial to know how long this introductory interest rate period applies to the card you’re considering so you have a better idea of how much money you can save.
Getting a balance transfer card can be great for those who need just a little bit of help paying down their debt, but as with anything, there are advantages and disadvantages.
The biggest advantage of a balance transfer credit card is the low, or in some cases, even lack of, interest rates.
Getting a balance transfer credit card with low or 0% introductory interest rates means paying much less in interest on your existing credit card debt. This change ensures that most of your payments go towards reducing the actual debt amount.
Depending on your debt load, a balance transfer card can potentially save you hundreds or even thousands of dollars during the promotional period. Paying less interest not only saves you money but also gives you more financial flexibility. You can put more money towards paying off your debt, which could help you get rid of it faster. Having all your debt on one card also makes managing your finances simpler, because it’s now all one payment.
A lower interest rate means you’ll be able to speed up your debt repayment. It means more of your money goes toward reducing what you owe, helping you pay off debt faster.
This is why balance transfer cards are seen as a great way to get ahead on your debt; they allow people to pay off their initial debt faster while also saving you money over time. If you’re using a balance transfer credit card, you always want to make sure you’re paying more than the minimum amount required.
If the only thing holding you back from paying off your debt quicker is the interest charges, then there’s a real advantage to getting a balance transfer card.
Saving money on interest means you can free up money to pay down other debts. If you have auto loans, personal loans, or student loans you’re trying to pay, then a balance transfer card can free up some extra funds for those.
By strategically allocating your savings from reduced interest, you can make significant progress in reducing these financial obligations and move closer to achieving your financial goals.
You could also set some money aside for an emergency fund or contribute the money towards long-term savings. Using a balance transfer card to pay off the remainder of your debt can give you the ability to begin to think about your overall financial goals.
While balance transfer cards offer a low or 0% introductory interest rate, it's crucial to note that this favourable rate doesn't last forever. Once the introductory period ends, the interest rate typically reverts to the card's standard rate, which may be higher than your previous cards.
This transition to a higher interest rate can catch some users off guard, leading to increased interest charges if the balance isn't paid off during the promotional period. It's important to have a clear repayment plan and budget in place to take full advantage of the low interest period.
Some cards also have a rule called retroactive interest. This means if you haven't paid off the full transferred balance by the end of the special period, they can charge you interest starting from when you first transferred the balance.
For example, let's say you transfer $2,000 to a card with a 0% intro rate for 12 months. If you haven't paid it off after 12 months, they can start charging interest on the $2,000 from day one.
While balance transfer cards offer temporary relief from high interest rates, they don't actually lower your debt load. This means you still owe the same amount of money; you're just paying less interest for a limited time.
It's important to recognize that balance transfer cards are a tool for managing interest costs, not reducing the actual debt amount.
Some people mistakenly view a balance transfer as a solution to reducing their overall debt burden. Without a comprehensive debt repayment plan in place, simply transferring balances from one card to another can create a cycle of debt shifting rather than debt elimination.
Using a balance transfer card can help you get rid of debt and increase your credit score in the long-term, but it may also hurt your credit score in the short-term.
This is because recent credit applications are taken into account as part of your credit score. While one new credit card application might not significantly lower your score, applying for multiple new credit lines can have a more noticeable impact.
If you’re looking for a way to reduce your debt more effectively than a balance transfer card and save on interest, debt consolidation is an option to consider. Unlike balance transfer cards, which offer a low interest rate for a short period of time, debt consolidation can offer a low interest rate for years.
While the interest rate on a debt consolidation loan is higher than the promotional period of a balance transfer card because it lasts for a longer period, you’ll save much more overall.
Debt consolidation also allows you to turn multiple payments into one monthly payment, but while a balance transfer card can only do this with credit card debt, debt consolidation can allow you to consolidate all kinds of debts, including credit cards, personal loans, payday loans, and, under certain conditions, student loans.
This means you can take many kinds of loans and begin to pay them off faster.
A consumer proposal can do something that no transfer balance card can: lower the amount you owe.
Unlike balance transfer cards that focus on interest management, a consumer proposal directly addresses the debt load by negotiating with creditors to settle for a portion of the total debt owed.
Only a Licensed Insolvency Trustee can make a consumer proposal on your behalf. A consumer proposal can reduce the amount of unsecured debt you owe by up to 80%, meaning you’ll have lower monthly payments.
It also combines all your unsecured debts into a single monthly payment, making tracking your debt much easier.
Unlike balance transfers that have limited timeframes, a consumer proposal offers a longer repayment period, usually up to five years. This extended time makes it more feasible to repay your debts without rushing.
Balance transfer cards can be a handy way to pay down debt, but they should not be seen as a complete debt management tool. If the only thing standing in the way of you paying off your credit card debt is the interest rate, then they’re certainly an option.
For those with more complex issues, debt consolidation or a consumer proposal is a better choice.
A Licensed Insolvency Trustee can assess your full financial condition and present you with every option available to you. The first consultation is unbiased and completely free.
September 26, 2024
A balance transfer credit card can help some people pay off their debt, but they come with some serious drawbacks. We look at the pros and cons of them here.
