Important things to know about balance transfer credit cards
Balance transfers can be an effective way to consolidate and address debt. But before you jump in, there are seven main variables you need to understand.
- Shop around for the rate, timing and terms that suit you best
If you’re considering a balance transfer to eliminate debt, your best bet might be a balance-transfer credit card. These cards come with promotions that let cardholders pay very low interest (sometimes as little as 0%) for a limited time (like six or 10 months). These offers can be a really effective way to bring down your debt, fast, if you are disciplined about making regular payments, and are not racking up a lot of new purchases. The card you choose will depend largely on what is available when you’re looking, how long you think you need to pay off your debt and the card’s other terms.
- Make sure you’re eligible for the balance transfer
Balance-transfer promotions are only valid when moving debt from a credit card at one bank to a card at another. It will not work between two cards from the same bank.
- Timing is everything
Balance-transfer promotions are available at the time that you make your application or sometimes shortly thereafter. Be strategic about when you apply and make sure you’re prepared to make the transfer. That means having the credit card company name, your name as it appears on the card, the debt total and the credit card number.
- Remember that balance transfer promotions don’t last forever
The low, single-digit rates available on balance-transfer credit cards feature limited-time offers. Once the promotional period is over, the cards’ regular interest rates will kick in, which will affect your monthly payments. How you handle this will depend on the amount of your debt and how quickly you think you can pay it off. But, in general, the best strategy is to pay off the balance before the balance-transfer offer ends and to pick a card with a low regular interest rate. This way, you’re saving money even if you still owe after the offer period.
- Make your minimum payments
Even when taking advantage of a balance transfer offer, you must make at least the minimum payment on the card, on time, each month. If you don’t, that super-low promotional interest rate can quickly be discontinued and the standard interest rate will kick in almost immediately. In other words, only take advantage of a balance transfer offer if you have the cash on hand to make at least the minimum payment each month and you’re in the right financial mindset to take on debt repayment.
- Balance transfer fees
Some—but not all—cards charge a fee for balance transfers. This fee is expressed as a percentage of the total amount you want to move, and it usually ranges from 1% to 3%. So, for example, if you’re looking to transfer $1,000 in debt to a card with a 3% fee, your opening balance will be $1,030. The additional cost may well be worth the money you’ll save at the new lower interest rate. But keep your eyes open for fee deals: Occasionally, a card will run a promotion where the balance transfer fee is waived.
- Separate your expenses
It can be tempting to consolidate all your expenses in one place, but beware: If you charge a new purchase to your balance-transfer card, this spend will be charged at the card’s regular interest rate, not the promotional rate. This might not seem like a big deal, especially if you’ve been lucky enough to find a card with a lower regular rate, but there’s an additional catch. Most credit cards apply payments to debt marked at the low or promotional rate first, which means your high-interest purchases are sitting there longer, racking up interest. If you’re trying to pay down debt, this only compounds the problem. It’s good practice to leave your balance-transfer card at home and use a different financial product (like debit, cash or even a different credit card) for new purchases.
How does a balance-transfer credit card impact my credit score?
When you apply for any credit card, you receive a hard credit inquiry that can temporarily bring your credit score down a few points. This includes balance transfer cards. However, this is not a reason to avoid applying.
If you’re looking into a balance-transfer credit card, it’s likely because you’ve got some outstanding credit card debt. Moving that debt in order to reduce it will have a positive, lasting impact on your credit score in the medium to long term.
The way this works is that the lower interest rates mean more of your money goes to paying down the balance, so you can reduce your debt load faster. A smaller debt load can improve your credit score because it lowers your credit utilization—a major credit score factor which measures the ratio between the balance and total credit limit. (Say you owe $600 on a credit card with a limit of $2,000. Then your credit utilization is 30%. Having a credit utilization score of 30% or lower is considered good.)
When you consider everything, the damage your debt load does to your credit score far outweighs the small and temporary effect on your credit score caused by an application. When it comes to debt, always look for the longer term solution.
Overview: Canada’s best balance transfer credit cards
More on the best credit cards
For the best balance transfer credit cards 2021 ranking, we categorized credit cards based on their limited-time balance transfer rates. Our rankings also took into account fixed annual interest rates on balance transfers and purchases, purchase protections and annual fees.