Credit card debt is one of the most profitable forms of debt for the big banks, so it should come as no surprise that banks are fighting for your business. If you have a large outstanding balance on your credit card and you’re already up to your ears in debt, a credit card balance transfer can seem like a lifeline. However, before you sign on the dotted line, it’s important to understand if this will help or hinder your financial situation.
What is a Credit Card Balance Transfer?
As the name suggests, a credit card balance transfer is when you transfer your outstanding balance from one credit card to another. If you’re carrying a balance on your credit card, why would you go through the trouble of transferring your debt to another lender? It’s because lenders typically offer low introductory interest rates on balance transfers as a marketing tactic to lure you in. Lenders hope that once you sign up for a credit card with them, you’ll take out other financial products like mortgages and lines of credit.
If you’re paying interest on your existing credit card at a typical rate of 19 per cent, you’ll quickly rack up credit card debt. That’s because credit card companies calculate your interest based on your daily outstanding balance – it can take you years and cost you thousand in interest if you only pay the minimum. Credit card companies offer balance transfer for as little as 0 per cent – that’s right, you could transfer your outstanding credit card debt and receive a break from paying sky high interest.
Why Should I Take Advantage?
If you’re running into temporary financial difficulties from job loss or illness, a balance transfer can offer a reprieve from racking up a lot of interest. While most insurance companies offer balance protection insurance, a balance transfer is usually a lot less costly since you avoid paying the monthly premiums of insurance.
Why Balance Transfer Might Not Be So Great
As the saying goes, there’s no such thing as a free lunch. Although credit card companies offer low introductory interest rates, there’s a catch. More often than not, there is a fee required to transfer your balance – most companies charge between one per cent and five per cent, based on how much you’ll be transferring. For example, if you’re transferring $10,000, you’ll typically pay between $100 (one per cent) and $500 (five per cent).
How Do I Come Out Ahead?
The best way to come out ahead with a credit card balance transfer is pay off your outstanding balance before the promotional period ends (typically six months). You can accomplish this by creating an aggressive repayment plan. If your cash flow is tight and you’re making extra payments on your mortgage, you should halt those payments immediately and instead use them towards paying down credit card debt. As long as you remain committed to repaying debt, balance transfers can be a great way to manage your debt.