Are you saddled with more credit card debt than you’d like? Between gifts, vacations and celebrations, the holiday season can be an especially expensive time of year. You’re not alone. Nearly one in four Canadians will finance part of their holiday expenses on their credit card, according to TD.
If you have credit card debt, or any debt for that matter, and you’d like to get rid of it as quickly as possible, we have an especially effective strategy for you that can save you $100’s, if not $1,000’s in interest costs – a 12 month 0% interest free holiday!
The Interest Free Holiday
If you’re carrying credit card debt at 19.99% or more, you’re making a terrible mistake. The most effective way to reduce your debt and its cost, is to do a 0% balance transfer.
A balance transfer is also simple. It’s where you get a new credit card to pay off debts on old cards or loans at a much lower rate; meaning you’ll be debt free faster. That said, not all balance transfers are created equal.
The best balance transfer deals in Canada, will offer you no annual fee, 0% for 12 months, with a 1% balance transfer fee. You start there. Then you surf your way to the next best balance transfer deal, and so on.
You need to know 3 rules before you do a balance transfer
#1 Always pay-down, or move, your balance transfer debt before the 0% rate expires. Your rate soars afterwards.
If you fail to pay off, or transfer, your debt to a new 0% deal before your low rate period ends, the bank wins. After the 0% rate expires, the interest rate typically spikes back to 19.99% to 22% APR.
Your goal should be to pay down the balance you transferred during the 0% promotional period, avoiding any interest. If you can’t then transfer it to another balance transfer card at 0%, before the go to rate comes into effect.
#2 At least pay the minimum payment. Miss a payment and your rate soars.
Never, ever, ever miss the monthly payment. Ever. If you miss a payment you will lose the 0% rate, and your rate will jump to the go to rate. If you have trouble remembering, use pre-authorized payments, and you’ll never be late again.
That said, use this interest free period to try to pay even more than your minimum monthly payment, since 100% of your payment goes to paying down your balance.
#3 Don’t make purchases, or cash advances, on balance transfer cards.
Balance transfer cards offer 0% on your transferred balances, but may charge you 19.99% or more on new purchases and up to 24.99% on cash advances. Many people think it’s a 0% card on all uses, it’s not.
Here’s another reason not to use balance transfer cards for purchases or cash advances. Banks will divide your monthly payment equally between all your balances. it won’t allocate your payment to your high interest balances first. They call this high interest “balance conservation”, because it will take you longer to pay down your more expensive, high interest balances.
To avoid this, make new purchases on a separate low interest credit card, a credit card with a promotional 0% interest rate on new purchases, or on a standard card and then transfer those balances to a 0% card.
#4 Balance Transfers Pay Down More Than Just Credit Cards
Whether you have high interest credit card debt, sales financing, lines of credit or personal loans, you can give yourself a 12 month interest holiday with a 0% balance transfer card.
In fact, with the no annual fee MBNA Platinum Plus card (only card that does this in Canada to our knowledge), you can transfer money from your credit card to your bank account, and get the same 0% for 12 month terms, with a 1% transfer fee.
You can then use those funds to pay down any higher interest debt you may have, directly from your checking account. In fact, you can use those funds at 0% for ANY purpose, whether it be to pay down loans, fund an RRSP, or as spending cash.
It will help you pay down your debts faster, more cheaply and more easily by consolidating all of your debts onto one card and one payment.