Not Including Balance Transfer and Annual Fees
Balance transfer cards reduce your monthly credit payment and allow you to pay off debt faster. They do this by allowing you to swap high-interest debt for low interest rates. For example, the average credit card has an APR of around 20.99%, while balance transfer cards typically have promotional rates ranging from 0% to 2.99%.
However, most balance transfer cards only have six to twelve months of a low-interest promotional period. If you haven't fully paid off your balance by the end of the period, your interest rate and monthly payments will increase again. As a result, balance transfer cards should be treated as a second chance to get out of a debt spiral. If you want to rebuild financial stability, continue reading to become an expert in balance transfer cards.
A balance transfer is when you move your debt from one credit card to another. For example, if you have a balance of $5,000 on a credit card with an APR of 20.99%, you could transfer that balance to a balance transfer credit card with a 0% intro APR for 12 months. After the 12 month intro period ends, the APR will increase to the standard rate, usually between 12.99% and 22.99%. As a result, you'll temporarily save on interest and have more money to pay down your balance.
There are a few things to keep in mind when doing a balance transfer:
In the long term, a balance transfer will improve your credit score. However, each new card you apply for will temporarily decrease your score. This is because credit issuers will perform a hard credit check when approving you for any credit card in Canada. However, your score will increase in the long term if you make all your payments on time and keep your credit utilization low.
Saving from high to low-interest rates can save you hundreds of dollars. The table below shows how much you could save by transferring your balance to a balance transfer credit card. The following scenario assumes you have a beginning balance of $6,000 on a travel credit card with an APR of 22.99%. You will be making monthly payments of $600. It compares the total interest and fees paid if you were to keep it on that card, or switch to a balance transfer card.
|Travel Card||Balance Transfer Card|
|APR||22.99%||0% (for 10 months)|
|Time to Pay off Balance||12 Months||10 Months|
|Balance Transfer Fee (1%)||N/A||$60|
|Total Interest & Fees Paid||$792.75||$60|
As you can see, balance transfer cards can be highly beneficial, especially if you have a large balance to pay off. However, it's important to remember that balance transfer cards should only be used as a last resort. If you're struggling to make payments on your balance transfer card, the issuer may close your account, and you'll be responsible for the balance.
The Annual Percentage Rate (APR) represents the actual cost of borrowing. It includes additional fees such as legal, administrative fees, and more. It's a better measure than the interest rate, which only demonstrates the direct cost of the loan and not related costs. As a result, a loan may be advertised with a low interest rate but secretly have a high APR. Lenders are required by law to disclose the loan’s APR, but you can also calculate the APR yourself.
A balance transfer is only worth it if you can pay off your balance before the intro period ends. If you can't, you'll be charged an increased interest rate at the end of your promotional period. The best time to do a balance transfer is when you have a balance on a high-interest credit card and can't pay it off within six months. Above, we have included a table of the best balance transfer cards in Canada to help you find a match.
While comparing balance transfer cards on their promotional interest rate is great, understanding their additional benefits may help you choose the best card. This includes annual fees, welcome bonuses, and more. This part will provide you with additional information to make informed decisions.
The annual fee is the yearly cost to keep your balance transfer credit card. Some cards charge an annual fee, while others do not. In general, the best balance transfer cards have an annual fee ranging from $0 to $29. However, in many cases the first year fee is waived.
As we mentioned earlier, balance transfer fees are usually 1% - 3% of the balance being transferred. If you're moving a balance of $5,000, you'll have to pay a balance transfer fee of $50 - $150. The fee varies by financial institutions and are listed below.
|Financial Institution||Balance Transfer Fee|
|CIBC||1% of total balance transferred|
|MBNA||3% of total balance transferred, $7.50 minimum|
|BMO||1% of total balance transferred|
|RBC||Up to 3% of total balance transferred|
|Scotiabank||2% of total balance transferred|
|TD||3% of total balance transferred, $5 minimum|
|Tangerine||3% of total balance transferred, $5 minimum|
The intro balance transfer rate is the promotional interest rate you'll receive when you open your balance transfer credit card. This rate is usually 0% for 6 months, 9 months, or 12 months. After the intro balance transfer period ends, a higher interest rate will apply to any remaining balance.
Balance transfer credit cards sometimes have a limit on how much you can transfer. This limit is usually calculated as a percentage of the card's assigned credit limit. For example, if you have a balance of $5,000 and a limit of 50%, you'll only be able to transfer $2,500 minus the balance transfer fee.
A welcome bonus is a perk that some balance transfer credit cards offer to new cardholders. The welcome bonus usually includes points, cash back, or travel rewards. For example, the BMO Rewards Mastercard provides a welcome bonus of 10,000 BMO points when you spend $1,000 in the first three months. Although be cautious of your spending if you are attempting to pay off your debt.
Some balance transfer cards offer cashback or rewards points. However, these balance transfer cards typically have a higher APR than cards that don't offer rewards.
As mentioned previously, balance transfer cards are a debt consolidation product. If you have home equity, you may be able to qualify for lower interest rates and save more in the long term. This is because balance transfer interest rates will shoot up to around 19.99% when the promotional period ends.
If you require more time to pay off your debt, the following products could be right for you. Additionally, you can begin with a balance transfer card and switch to the following products once the promotional rate ends.
|Balance Transfer||0% to 2.99% (for 6-12 months)|
*Using rates from Jun 21, 2022.
A home equity line of credit (HELOC) allows you to borrow money from your home. You can borrow up to a specific limit, and you only have to pay interest on the money you borrow. This differs from a refinance or second mortgage, which offers a lump sum of money. Additionally, HELOCs tend to have interest rates comparable to balance transfers.
A mortgage refinance allows you to withdraw money from your home equity at the market mortgage rate. You can withdraw a maximum of 80% of your home's value. For example, imagine your home is worth $1,000,000 with a mortgage balance of $600,000. Considering you can borrow up to 80%, or $800,000, this would allow you to withdraw up to $200,000 from your home equity.
By withdrawing this amount, your monthly mortgage payment will either increase, or you can keep the payments similar by extending the amount of time it takes to repay your mortgage. Note that to avoid mortgage-breaking penalties, it's best to refinance at the end of your mortgage term. Most Canadians have a five-year term.
A second mortgage provides more flexibility than a mortgage refinance in exchange for a slightly higher interest rate. This is because you won't need to wait for your mortgage term to end to refinance. You can receive a second mortgage at any time without penalties. However, you are still limited to borrowing up to 80% of your home's value.
Personal loans don't require you to have a home. The interest rates on personal loans will be higher than those mentioned. However, you may need to offer collateral, such as a car, to get the lowest rates.