Are you carrying a credit card balance that you just can’t seem to pay off? With a 20% interest rate, it can be challenging to stay on top of growing debt. If you can’t make substantial credit card payments, interest will compound over time, thereby becoming a bigger problem. Fortunately, balance transfer credit cards in Canada can help you escape the burden of credit card debt when used correctly. In this guide, we will tell you all we know about balance transfer cards and the best outlets to get one. Keep reading to learn more!
Table of contents
- What are balance transfer credit cards in Canada?
- How do balance transfer credit cards in Canada work?
- Does a balance transfer pay off a credit card?
- Do balance transfers affect your credit score?
- How many times can you balance transfer?
- Can all credit cards do balance transfers?
- Which banks are offering 0% balance transfers?
- 1. Scotiabank
- 2. The Canadian Imperial Bank of Commerce or CIBC
- 3. MBNA True Line Mastercard
- 4. The Bank of Montreal (BMO)
- Are 0% balance transfer worth it?
- Are balance transfers worth it?
What are balance transfer credit cards in Canada?
For Canadians, a balance transfer credit card allows you to move debts from one credit card to another. In other words, transferring your old credit card debt to a new card with a lower interest rate. This way, you can control your debts within one card and save money on high-interest payments.
Before we keep going, consider a brief example. Let’s say you have a 20% Annual Percentage Rate (APR) attached to a credit card balance of $5,000. Paying $250 every month will take you about two years to pay off, with $1,134 of the total representing interest. Now, let’s assume you move the $5,000 to a balance transfer credit card in Canada. You can pay off the debt in a year with no interest, thanks to the perks of this special card. You will only have to pay a one time fee to move the balance from one card to another. Plus, you gain by putting all your debts in one place. You don’t have to worry about tracking your different credit card accounts or their monthly payments.
But, be aware that these balance transfer credit cards have limitations.Before switching to balance transfer credit cards in Canada, understand how it works. This will help you determine if it is the best option for you.
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How do balance transfer credit cards in Canada work?
You might be wondering what the motivation is to use a balance transfer credit card. After the transfer is said and done, you still owe the full debt, so what’s the point? The main attraction of balance transfers is a promotional interest rate. Often, the rate is 0% or much lower than the usual 20%. Once you complete your balance transfer, the promotional rate will come into effect. This means your debt yields less interest.
The main catch is the promotional rate is only valid for a certain period of time. This can range anywhere from a few months to a year. While this may seem daunting, many use it as motivation to eliminate their credit card debt by the end of the promotional period. This is because your debt is yielding little to no interest and there’s a set period of time to repay the balance. Using balance transfer credit cards in Canada is an effective short term debt management strategy. In order for it to be effective, borrowers should consider their budget and how much they can realistically put towards credit card payments. By considering this number, you can plan for balance transfers and determine if you can eliminate the debt by the end of the promotional period. If you can’t pay off the balance by the end of the promotional period, you may want to consider other debt solutions.
Another aspect to consider are the transfer fees. The issuer of the balance transfer card charges a one time fee to transfer the funds from the old card to the new card. The rate can be a percentage of the total being transferred or a flat fee, depending on the provider. While additional fees can be a big drawback, the cost is often cheaper than accumulating interest.
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Does a balance transfer pay off a credit card?
Technically, a balance transfer pays off a credit card debt. The thing is, when you complete your balance transfer, the new card issuer helps you pay off the debt on your old card. That way, the existing balance on that card is cleared. This officially ends your business with them.
However, this development means you owe the new card issuer a debt. Yet, this new debt often has a lower interest rate or a 0% promotional interest offer that runs for a specific period of time. This is what motivates Canadians to utilize balance transfer credit cards in the first place. Overall, balance transfer credit cards in Canada are one of many debt solutions.
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Do balance transfers affect your credit score?
Moving your credit card debts from one card to another may sound like a good idea from a monetary perspective. That is considering this technique can help you to avoid paying interest, or reduce the interest paid. But what about the impact to your credit score? Generally speaking, opening new balance transfer credit cards in Canada constantly is detrimental to your credit. When someone applies for lots of new debt, including balance transfer credit cards, it can indicate financial distress which reflects in your score.
Every time you apply for a new card, the issuing credit card company will run a credit check. Each request represents a hard inquiry, which remains on your report for a few years. Suppose you have too many hard inquiries too close together. In that case, lenders may believe you are desperate for cash or experiencing financial turmoil (whether it’s true or not). Furthermore, they may assume you are taking on more debt than you can repay.
This, coupled with the fact that hard inquiries can stay on your report for a while, is not a good look on your credit report and score. But don’t worry; it is not always bad news. If you can pay off your debt faster via a balance transfer credit card, you can improve your debt-to-credit ratio. This has a positive impact on your credit history down the line.
To summarize, balance transfer credit cards do impact your credit score. But as long as you use them responsibly and as a tool to eliminate debt, the effect on your credit score will be minimal. In fact, a balance transfer credit card can improve your credit score over time when used properly.
How many times can you balance transfer?
Generally, there is no limit on how many times you can initiate balance transfers. However, there are many factors and potential drawbacks to consider. For example, balance transfer credit cards in Canada often have associated transfer charges. These are one time fees to complete the transfer from one card to another. The more balance transfers you do, the higher this cost will be.
You may have to pay a minimum monthly payment on your new card, similar to any other credit card. This payment must be made before the due date to maintain the low or zero interest rate offer. In addition, breaching any of the rules outlined in your credit card agreement can be a problem. Common breaches include late payments and exceeding credit limits. The penalties that follow can force your interest rate to spike or negatively impact your credit score. A regular balance transfer may not be a good long-term debt management strategy for this reason. Rather, it’s often utilized as a short term debt management tactic. Approach this strategy with caution!
Can all credit cards do balance transfers?
Most credit cards allow for balance transfers. This is because the new issuer repays the debt on behalf of the borrower. Then, the borrower owes the new issuer instead of the old issuer.
The only exception is within a single bank. For instance, if you have a credit card with Bank A, they may not allow you to complete a balance transfer to another Bank A credit card. This is because there’s little motivation for them to offer you a promotional interest rate when they can profit off of your existing debt. But you could get a balance transfer credit card with Bank B. However, this exception varies from bank to bank — it’s not a hard and fast rule.
If you’re unsure if your credit card allows for balance transfers, contact them to find out the specific parameters. You can also read the fine print of your credit card agreement to get more information.
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Which banks are offering 0% balance transfers?
As mentioned, many balance transfer credit cards in Canada offer 0% promotional interest rates. We outlined some of these financial institutions and their offerings below:
1. Scotiabank
If you are already a customer of Scotiabank, there is a good deal for you. There is an excellent balance transfer offer through the Scotia Value Visa card. With this, you get a 0% introductory interest rate. This applies to all balance transfers you do within the first six months of getting the card. Note that this offer will end on the 31st of October, 2023.
2. The Canadian Imperial Bank of Commerce or CIBC
The CIBC Select Visa Card has a 0% interest rate that lasts for ten months. It also has one of the lowest balance transfer fees in the market at 1%. The CIBC Select Visa Card offers other perks, like gas discounts and insurance. But note that there are conditions attached to its balance transfer offer. So, ensure to read the fine print before agreeing to anything.
3. MBNA True Line Mastercard
Through its MBNA division, this bank offers various Mastercard credit cards. The MBNA True Line Mastercard has a 0% balance transfer interest rate. Note that this offer only lasts a year, and the regular rate applies afterward. To enjoy the 0% promotional rate, you must complete your balance transfers within 90 days. That is, the first 90 days of opening your account.
4. The Bank of Montreal (BMO)
Although not the strongest of offers, BMO still manages to fit into the 0% interest rate category. The Bank of Montreal has an exciting 0.099% introductory offer on balance transfers through its BMO Preferred Rate MasterCard. Holders also enjoy a 0% annual fee, with reward points every time you use the card. But note that to enjoy the 0% interest rate, the balance transfer must occur within the first nine months.
Are 0% balance transfer worth it?
If you want to save on interest payments on existing credit card debts, 0% balance transfers can be good for you. But whether or not 0% balance transfers are worth it, in general, depends on the specific situation. Here are some factors to consider before deciding whether this option is good for you or not:
- Some zero-balance transfer credit cards in Canada may have transfer fees. These can eat into your future savings.
- The promotional period attached to the zero interest rate offer only lasts for a set period of time. This is typically between 6 to 18 months. After this duration, you may have to pay the regular interest rate you originally escaped.
- The ultimate goal of balance transfers is to eliminate your debt by the end of the promotional period. If your debt is sizable, it may be impossible to achieve this. Instead, you may need to consider long term debt management strategies.
- There is a potential impact to your credit score, as discussed above.
If you have a solid plan to pay off your debt within the safe period, go for it. But if not, a 0% balance transfer may not be the best for your situation.
Are balance transfers worth it?
Whether balance transfer credit cards in Canada are worth it depends on your unique situation. These transfers have immense benefits, like reduced interest payments and the opportunity to become debt-free. But, there are factors and risks to consider. These include transfer fees and the duration of promotional rates. Another factor is your ability to pay within the finite promotional period.
Consider all these factors against your financial goals and credit score. This will help you decide if this is what you need. And if you still need help? Advisorsavvy can help! Fill out this quick questionnaire to meet with a financial advisor. But in the mean time, we believe that the tips in this guide will serve as a pointer to help you make the right decision!
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