Let’s talk about consumer debt; the Cruella de Vil of personal finance. I’m sure we all remember the day we got our first credit card. It was exciting, right? All of a sudden you had access to money at just the swipe of a card and you didn’t have to worry about when your pay cheque was getting deposited. It’s a big jump into adulthood, but not one that we all dealt with responsibly. I don’t have a story of paying off a considerable sum of debt, but I did struggle with keeping my consumer debt under control. Having a credit card made it too easy to rack up purchases that I wasn’t able to cover when my bill showed up the next month. Getting into this cycle can turn innocent purchases into a debt spiral in a pretty short timeframe.

Once you’re in that cycle, paying off consumer debt can feel like an endless struggle. High-interest rates mean only a portion of your payment goes to paying down principal, and if you’re only making the minimum payments it can take years to catch-up. Your minimum payment is usually a calculated as a percentage of the outstanding balance on the card. This can range from as low as 2% to as high as 5%. If you want to find out how yours is calculated it will be in the credit card agreement you got when you signed up.

The Numbers…

Let’s say you have a $10,000 balance on a credit card with an interest rate of 18.99% (fairly standard) and you are paying $300 towards the balance each month. How long is it going to take you to pay off and how much interest will you pay over that period? The numbers aren’t pretty. It will take you four years to get that balance down to zero, and you will pay $4,325 in interest. That $10,000 debt has now cost you $14,325. Ugh. (If you want to run your own numbers, you can use this calculator)

What if I told you there was a way to speed that up and pay less interest without increasing your monthly payments? You’d jump all over it, right? Well, good news! A balance transfer credit card can help you do precisely that. It’s a tool I used to pay off my lingering credit card balance once and for all.

What is a balance transfer credit card?

It works the same as any ordinary credit card, but with a new sign-up perk. The company is going to offer you a low-interest rate for a promotional term if you move over a balance from a different credit card. The very best offers out there will get you a 0% interest rate for up to one year. That means you won’t have to pay one penny of interest for 12 months. It gives you a chance to make a serious dent in that balance.

One important thing to note is that while a balance transfer card might work like a typical credit card, you shouldn’t take advantage of that. The promotional interest rate is only going to apply on balance transfers and won’t be applied to new purchases you make with the card. When I got my card I set-up the transfer and then hid the card. The goal was to pay off that debt in full, not add to it. I still used my existing credit card for new purchases and made sure to pay it off in full each month to break the cycle.

The New Numbers

To see how much you could save let’s run the above example again but with a 0% interest rate for 12 months. By paying $300 per month towards a $10,000 balance, you’ll be sitting with a balance of $6,400 at the end of the promotional term. If that interest rate now goes back up to 18.99%, you’ll be looking at an additional 27 months of payments and interest charges of $1,470. It’s still a long time and a lot of money, but $1,470 is a heck of a lot better than $4,325.

It might sound too good to be true, but it’s not. The reason companies will offer deals like this is to tempt new customers. They are banking on the fact you won’t pay off the full balance during that promo term, and they’ll reap the interest rewards when your rate jumps back up. Banks and credit card companies want your business, and they’re willing to front you a great deal to get you to switch providers with the hope you’ll stick around long-term. It’s the same reason you almost always get a better deal by switching your cell phone or cable provider. New clients are worth more than existing clients.

Cycle It

If you still have a balance after your promotional rate term ends, no one is stopping you from shopping around to find another balance transfer offer to take advantage of. You might even find that your old credit card is desperate to get your business back and will offer you a sweet deal.

Going back to your old credit card can be the best option if they are offering a competitive rate. It means you wouldn’t have to apply for an additional card. If you are struggling to increase your credit score, then this is something you might be concerned about. Obviously getting your high-interest debt paid off is the top priority but each time a new company pulls your credit, it can knock your score down a couple of points. Not the end of the world but it’s worth avoiding if you can. You also won’t need to go through the approval process again. Because you are now sitting with multiple credit cards, it can be that much harder to get approved for another one.

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The Best Balance Transfer Credit Cards in Canada

In Canada, there is significantly less competition in the credit card sector. Less competition means less enticing offers for the consumer. The goal of a balance transfer is to find the card with the lowest interest rate and the longest promotional term. Your goal is 0%, but the pickings are slim. Here I’ve rounded up a couple of options that offer good rates.

  1. MBNA Platinum Plus Mastercard
    • This is the ultimate card for balance transfers. You will get a 0% interest rate for 12 months, and there is no annual fee. You will have to pay a 1% fee on the balance you transfer. With this card, you’ll get the longest 0% term of any balance transfer card available right now.
  2. American Express SimplyCash Card
    • The SimplyCash card also has no annual fee to use it and no charge to complete a balance transfer. However, the interest rate is set for 1.99% on balance transfers, and the promotional term is only six months. You are also only allowed to use 50% of your assigned credit limit (up to $7,500) for a balance transfer.
  3. Scotiabank Value Visa
    • A third option is this Scotiabank Visa. It offers a balance transfer rate of only 0.99% for the first six months. The one catch is that it has an annual fee of $29. Considering the low-interest rate, it’s still not a bad option.

An Alternative

If your credit is in a bad way, there is a chance you might be rejected for an additional credit card. In that situation, you will still want to get the lowest interest rate possible on your debt but will have to stick with what you have. This is where I suggest giving your credit card company a call and negotiating a lower interest rate. You may be able to get this free of charge, or you may have to upgrade. Paying a fee might not sound great, but if you are carrying debt, then it might be worth it long-term.

For example, reducing the interest rate on your credit card from 18.99% to 11.99% can save you $700  in one year if you are carrying a $10,000 balance. That’s definitely worth paying a $29 or even $99 annual fee.

A balance transfer credit card can be a fantastic tool to pay your debt off in full. It’s not a magic cure. But could save you thousands in interest charges and shave years off your repayment schedule. To set yourself up for success you will also want to choose a debt repayment plan to make the most of the balance transfer and pay off your debt as fast as possible.

Do you have debt you’re working to pay off? Does a balance transfer credit card sound like repayment tool that might work for you?

Looking for help paying off #debt? You should try a balance transfer credit card.

This post was proofread by Grammarly.

Image Credit: Lukas Blazek

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