How Credit Card Balance Transfers Work in Canada

Managing your credit is a crucial aspect of maintaining a your financial health. However, even the most careful of consumers can sometimes find themselves with rising credit card debt, and that's when it's important to be aware of the options and strategies available to help you regain control of your finances.

If you find yourself in a situation where you’re not paying off your credit card in full, a balance transfer is one strategy to reduce the interest you’re paying. A balance transfer involves moving an outstanding debt balance from one credit card to another, with the aim of reducing interest costs by moving the balance to a card with a lower interest rate. This process can be a valuable tool for individuals looking to manage their credit card debt more effectively, speed up their way out of debt and protect their credit score.

Understanding Credit Card Balance Transfers

A credit card balance transfer involves moving the outstanding balance from one credit card to another, typically one with a lower interest rate. The primary goal of this financial move is to reduce the amount you're paying in interest, allowing you to pay off your debt more efficiently and quickly. Here's how it works:

1. Choose a Suitable Credit Card: Start by researching and selecting a credit card that offers a low-interest rate on balance transfers. Many credit card issuers in Canada offer 0% on balance transfers for a set period, like 6-12 months, so shop around to find the best offer available. Ideally you want the interest rate to be as low as possible for as long as possible.

2. Apply for the New Card: Once you've found the right card, apply for it. If approved, the credit card issuer will provide you with a credit limit, and you can request a balance transfer from your existing high-interest credit card to the new one.

3. Transfer Your Balance: After approval, initiate the balance transfer. The new credit card issuer will pay off the outstanding balance on your old card, effectively consolidating your debt onto the new card.

4. Take Advantage of the Promotional Period: During the promotional period with the lower or 0% interest rate, you can focus on paying down the debt without the burden of accumulating high-interest charges. This can make a significant difference in your journey to becoming debt-free.

Let’s take an example where you have a balance of $5,000 with an annual percentage rate of 19.99%. The MBNA True Line Mastercard offers a 0% promotional annual interest rate (AIR) for 12 months on balance transfers, with a 3% balance transfer fee. Your total current interest is $974.76, but if you transferred your balance to the MBNA True Line Mastercard during the promotional period, that would go down to $150.00 (= the 3% transfer fee). This means that by transferring your balance, you could save $824.96 on interest payments in a year.

Can you do a balance transfer on multiple credit cards?

If you're carrying higher-interest debt across multiple credit cards, then you should be able to transfer the balance from all of them to your new credit card. But remember, you can't go over the credit limit on your new credit card.

Can you do a balance transfer on lines of credit?

Balance transfers are usually used for credit card debt, but some issuers in Canada will also let you move balances from other types of debt, such as lines of credit, personal loans or even student loans.

What are the benefits of a credit card balance transfer?

Credit card balance transfers offer a range of benefits that can positively impact your financial well-being. Let's explore these advantages in detail:

1. Reduced Interest Costs: One of the most obvious benefits of a credit card balance transfer is the potential to significantly reduce the amount you're paying in interest. By moving your debt to a credit card with a lower or 0% promotional interest rate, you can save a substantial sum over time (as shown in the example above). This means more of your payments go towards reducing the principal balance, allowing you to pay off your debt faster.

2. Simplified Debt Management: Managing multiple credit card balances with varying due dates and interest rates can be challenging. With a balance transfer, you consolidate your debt onto a single card, simplifying your financial life. This not only makes it easier to keep track of payments but also reduces the risk of missing due dates and incurring late fees.

3. Lower Credit Utilization Ratio: A credit card balance transfer can lead to a lower credit utilization ratio. This is because adding a new card adds to your total credit available, so as long as you don't take on any additional debt once you make the transfer, your credit utilization should improve (be lower). Your credit utilization ratio represents approximately 30% of your credit score, and should be below 30%. A lower ratio indicates that you're using less of your available credit, which is generally seen as responsible credit management.

4. Financial Peace of Mind: Knowing that you're actively taking steps to tackle your credit card debt can provide a sense of financial security and peace of mind. It can reduce stress associated with debt and improve your overall financial well-being.

Balance transfers warnings

While credit card balance transfers offer several advantages, they may not be the right choice for everyone in every situation. It's essential to consider the following scenarios when a balance transfer might not be the best financial move:

1. High Balance Transfer Fees: Some credit card issuers charge a fee for balance transfers, typically a percentage of the amount being transferred for example, 1% or 2%. If the transfer fee is so large that it offsets the potential interest savings, this makes the transfer less cost-effective. For example, if your current interest rate is 17.99%, balance transfer fee is 2%, and the interest rate on the new card is 15.99%, you haven’t gained any interest savings in the first year.

2. Accumulating More Debt: If the cause of your debt was poor spending habits, transferring your credit card balances to a new card doesn't eliminate the root cause of your debt. If you continue to use your old credit cards without paying down the balance, you’ll only accumulate more debt.

3. Overlooking the Terms and Conditions: It's crucial to read and understand the terms and conditions of the new credit card and the balance transfer offer thoroughly. Missing a payment or not adhering to the terms (e.g. using the card for cash advances during the promotional period if the terms forbid you from doing so, applying for bankruptcy during the promotional period, or any type of fraudulent activity, among other possible violations) will result in the loss of the promotional rate and additional fees.

4. Impact on Credit Score: While balance transfers can have a positive impact on your credit score in the long run, applying for new credit cards can have a small, temporary negative effect on your credit score because of the fact that the lender will need to carry out a hard credit check on you before determining whether you are eligible. However, as long as you manage your debt responsibly once you have the new credit card, the long-term benefits to your credit score should outstrip any small dips when applying for the card.

The Bottom Line

Credit card balance transfers can be a powerful tool for Canadians looking to pay down  their credit card debt faster and save on interest. By taking advantage of promotional balance transfer interest rates, making timely payments, and reducing credit card debt, you can set yourself on a path towards improved financial well-being.