A Credit Card Balance Transfer is a mechanism that allows someone with a credit card to transfer their existing debt on their Credit Cards (including MC, Visa or Store cards) to another Credit Card typically at a lower rate (0%-3.99%) for an introductory period. The new Credit Card issuing bank will typically charge either a percentage of the transferred balance or a minimum fixed dollar charge. Once the introductory period is over, the transferred balance will then be charged a new interest rate, which is usually around the same rate as average cards, but can be higher.
An easy way to think of a Balance Transfer, is that it is an interest holiday from the often times much higher 19.99% interest rates for Visa and Mastercard and 29.99% for store cards. It can be the best credit card option for those who have existing credit card debt and are looking to lower their interest payments.
During the interest holiday period where a Credit Card holder will usually be paying 0%-3.99% interest, they should pay back as much of their credit card debt as they can before the introductory period expires and rates go back up to the 19.99% range.
A Credit Card issuer extends Balance Transfer offers to cardholders in the hopes the cardholder will shift their outstandings from other issuer’s Credit Cards to their Credit Card. The bank then hopes you will continue using your Credit Card if you paid down the balance by the end of the introductory period. Or, they hope you don’t pay down your balance by the end of the introductory period, and then start paying the higher interest rates on all of the balances you transferred over.
A low Balance Transfer credit card can save those with outstanding credit card debt a lot of money during the introductory interest period i.e. interest holiday. For example if a cardholder has $3,000 in credit card debt, he will typically be paying around $45 per month at interest rates of 19.99%. He would only be paying $2.5 per month at the 1% introductory rate. Plus he would have had to pay the transfer fee of 1% which comes out to $30. Over an introductory period of 12 months, that’s a savings of $539 in interest costs.
If a cardholder plans to pay down his credit card debt by the end of the balance transfer introductory period, he simply needs to look for the balance transfer offer with the lowest rate and longest term. Or, a cardholder can also transfer his balance to another credit card, at the end of the introductory period, extending his “interest holiday” even further. This is called “rate surfing”. Canadians are relatively behind using the strategy, but in the U.K. and the U.S. rate surfing is widely utilized and one of the primary reasons people open new credit card accounts.
While there are several Balance Transfer offers in the Canadian marketplace today, oddly there is only one issuer offering a 0% balance transfer rate. We find that pretty curious, considering that in the U.K. and the U.S. there are 20+ cards in each country that offer 0% balance transfers. In Canada, MBNA/TD is the only Credit Card issuer offering a 0% Balance Transfer with its PlatinumPlus Mastercard, for 12 months, with no annual fee and a 1% transfer fee.
Balance Transfers can save cardholders with existing debt significant sums of money. Used properly, they can save hundreds of dollars if not thousands, especially if cardholders have credit card interest rates of 19.99% or higher. Why more Canadians don’t use the product is a mystery.