Balance transfer cards are designed to help borrowers with high-interest cards and thus attract new customers. They can move the money owed (outstanding balances) to an account with another financial institution.
Reasons for Transferring a Balance
There are different reasons to transfer a balance – perks and airmiles, no annual fee, fewer penalties, and lower interest rate. Hefty interest charges are the main reason to move one’s debts to an issuer that offers better terms. Many customers opt for a product with a low introductory interest rate or grace period during which interest charges are not assessed. Those who pay their balance in full benefit from this option and repay the outstanding debt quicker. Given that many banks offer a teaser rate, it is important to pay down the principal before the interest-free period is over. Teaser or promotional rates are offered for an introductory period of 6 to 15 months. Borrowers who make timely payments benefit from it. Failure to make on-time payments often leads to the withdrawal of the promotional interest rate. It is important to ask about the length of the interest-free period because it will change suddenly once the opening offer expires.
Debt consolidation is another reason to move high-interest balances. Borrowers can transfer multiple debts to a new credit card and are left with a single debt to pay down. This is beneficial if the issuer offers a high credit limit and low interest rate. Consolidation can be risky, however, especially if you are not prudent and disciplined. This is a short-term fix, and there are hidden fees, charges, and penalties in some cases.
Let’s say you are transferring $15,000 to consolidate your debts. You have paid $800 by the time the interest rate jumps to 12 percent. The minimum payment is $380. If you pay the minimum each month, it will take you 392 months or 32.6 years to pay down the outstanding amount. You will pay a total of $18,546 in interest charges during this period. Even a small increase in your monthly payments can make a huge difference. If you increase the monthly payment by $50, you will pay down the outstanding balance in 59 months or less than 5 years. Moreover, you will pay only $6,200 in interest charges which is three times less than what you will pay if you were to make the minimum payment. This is presuming that you won’t use your card to make payments or you will rack up more debt.
One problem with debt consolidation is that you are making payments over a longer period of time. Thus you will end up paying more in interest charges. Consolidation is a good option only if the issuer offers a substantially lower interest rate, and you can afford the monthly payment. It is not an option if you don’t have a regular income, whether wages, salary, investment or rental income, child support, savings or other sources of income.
When a Balance Transfer is a Bad Idea
Some banks and companies charge hefty fees that may cancel out your savings. Another factor to take into account is the amount of money owed. A borrower may be able to pay down the amount due in 6 months if he owes $1,200. Paying a principal of $25,000 is more difficult if one’s monthly income is $1,800. The length of the grace period is also important. The longer the interest-free period, the better the chances of paying down the principal.
A balance transfer is a bad idea for customers who pay the minimum each month. The purpose of moving debts is to take advantage of the promotional offer and pay one’s debts as quickly as possible. Knowing that the rate increases in 2 or 3 months should motivate borrowers to pay more than the minimum. In fact, a balance transfer may hurt one’s credit score. If it is 30 percent above the available limit will affect your credit rating.
Who Qualifies for a Zero APR?
Not everyone is offered a 0 percent introductory interest rate. This depends on factors such as credit score, payment history, income level, and others. Some issuers require that applicants have a minimum personal income of $20,000. Other issuers such as Capital One have a minimum income requirement of $40,000. Financial institutions such as the Bank of Montreal offer cards to applicants with good credit and charge no fee. Borrowers are offered the typical interest rate and not a teaser rate of zero APR.
Calculating Your Savings
You will need some numbers to calculate your savings. These include the balance transfer and annual fee, the typical APR, the length of the promotional offer, and the introductory interest rate. Let’s say that you owe $4,200 at 18 percent APR. You move it to a credit card with a 12-month promotional period, 4 percent interest rate, and 3 percent in fees. The rate increases to 12 percent once the introductory offer expires. Your current interest charges are $756 a year. You will pay $126 in fees and $168 in interest charges during the first year (the promotional period). Your savings are worth $462 ($756 – ($126 + $168)). Your old bank charges $63 a month at 18 percent. You will pay $42 in interest charges a month once the introductory period is over. This means that you will be paying $21 less every month. If the issuer charges an annual fee, you should deduct it as well. Some cards go with very high annual fees of up to $500.
Choosing a Card
Many issuers offer different interest rates for purchases and balance transfers. Examples include the Capital One Guaranteed Secured MasterCard, American Express AIR MILES Credit Card, and CIBC Classic Visa. They may also have a different interest rate for cash advances. Make sure you know which balances receive the typical interest rate. Another question to ask your issuer is whether the introductory rate applies to purchases. Obviously, you should ask how long it will take you to repay the amount due. The new card may also have a balance. This means that you will be making payments over a longer period of time. With most issuers, the monthly payment goes toward the card with the lowest rate of interest. You will benefit from this arrangement provided that you are offered a low promotional rate. It will work to your disadvantage if you are offered a product with a higher interest rate.
If the new card has a balance transfer fee, it may be a flat fee or a percentage of the amount transferred. Issuers typically charge between 2 and 4 percent. The higher the outstanding balance, the higher the fee. While some issuers offer such credit cards with 0 to 2 percent in fees (e.g. MBNA), others charge fees of 6 – 12 percent. Capital One, for example, offers an interest rate of 11.9 percent on balance transfers.
Top 4 Balance Transfer credit cards
Scotiabank Value® VISA* card
Scotiabank offers a flexible solution to transfer existing balances at a low introductory rate of 0.99 percent on transfers, cash advances, and checks. Customers benefit from a low promo rate over a 6-month period to repay existing balances faster and save on interest charges. There are other benefits such as car rental discounts, a low standard rate, convenient telephone banking, and others. Instant cash advances at 1 million ATMs are also available.
- Annual fee: $29
- Standard purchase rate: 11.99 percent
- Credit limit: min $500
President’s Choice Financial® MasterCard
Also a great balance transfer solution by President’s Choice Financial, this credit card offers holders the opportunity to earn points on purchases and travel services. Holders earn 20 bonus points for each dollar in travel services and 10 points for each dollar in everyday purchases. There are optional extras such as standard and spousal account balance protection, monitoring and surveillance services, security software, quarterly reports, and a lot more.
- Purchase rate: 19.97 percent
- Promotional rate: 0.97 percent
- No annual fee
- Grace period: 21 days
Smart Cash MasterCard® credit card
MBNA offers a balance transfer card with generous money rebates and a promotional rate of 1.99 percent during the first 10 months. Holders earn 1 percent on all purchases, 5 percent on groceries and gas during the first 6 months, and then 2 percent on grocery and gas station purchases. Customers are free to make balance transfers in the amount up to the limit of their credit line.
- Interest rate: 19.99 percent
- Grace period: 21 days
- No annual fee
RBC Visa Classic Low Rate Option
This balance transfer option goes with a low annual fee, and there is no annual fee on supplementary cards. It is a good solution for customers who are looking for an effective and quick debt consolidation tool and a single monthly payment. Borrowers who often carry a balance also benefit from a fixed low interest rate on their credit card.
- Interest rate on cash advances and purchases: 11.99 percent
- Annual fee: $20
- Free additional cards