Are Balance Transfer Credit Cards Worth It?

Balance transfer credit cards are a great way to catch your breath when you’re drowning in high-interest debt. By paying off one credit card with another at a much lower rate, you can significantly reduce your monthly interest charges and get back on track financially.

The Pros of Balance Transfer Credit Cards

The main advantage of these cards is their interest rate, which is lower than the rate of other cards and sometimes of other types of credit on the market. Balance transfer credit cards come in two forms: cards with welcome offers at a very low rate but only for a short period (“6 months at 0%”) and cards with a permanent low rate, which generally fluctuates between 8.99% and 14.99%.

Let’s take an example. You have two credit cards at 20.99% interest, with debts of $5,000 and $3,000 respectively. The following table presents four scenarios comparing the total interest paid according to your card’s rate and the timeframe of your repayment plan.

All in all, without doing anything to improve your situation, you risk paying thousands of dollars in interest. By transferring your balances to a low-rate card, with a good six-month repayment plan, you save over $5,725.

Are Balance Transfer Cards Better than a Line of Credit or a Consolidation Loan?

Lines of credit sometimes offer better interest rates than low-rate cards. For example, my home equity line of credit is at 7.2% at the time of writing. So, if I had too much credit card debt, I could try to clear it using my line of credit.

Another option is to consolidate the debts with a loan. However, financial institutions won’t necessarily offer you a better rate than a balance transfer card. The only advantage of opting for a loan, in this case, will be to avoid having a third credit card. This is important for people who find it hard to control their spending.

With a new card, you could end up using three cards to make new purchases. If you feel you’re at risk of getting into debt again, consider closing your cards with the highest rates.

The Cons of Balance Transfer Credit Cards

Cards that offer attractive promotions or permanent low interest rates have one thing in common: they offer little or no rewards. You’re more likely to find rewards with cards that offer a balance transfer welcome offer. Moreover, some cards charge annual fees, although these are minimal.

In general, there is also a balance transfer fee, usually representing between 1% and 5% of the amount transferred. On an $8,000 debt, we’re talking about $80 if the fee is 1%. Promotional offers are sometimes available to waive these fees.

The Impact of Balance Transfers on your Credit Score

Your credit score is impacted every time you apply for a new credit card. As a result, it may suffer a small drop when you apply for a balance transfer card. And if you choose to transfer to a card with a limited-time promotion, then transfer again six months later to another card also offering a special rate, repeating the process several times will worsen your credit score and make it difficult to obtain new credit.

On the contrary, when everything is done correctly, meaning when you actually pay off your balances with the new card without going further into debt, you can improve your credit score. In fact, your debt ratio (another factor taken into account by the credit score) will be reduced after the repayments.

Before Making a Balance Transfer

In general, it’s a good idea to understand your contract before committing to a lender. Check the date from which interest will start to accrue on your low-rate card. Sometimes lenders waive the interest-free grace period on new purchases. This means you could start accruing interest immediately on all new purchases. Also check whether there’s a limit to the balance transfer amount: in the example given above, this limit would have to be over $8,000 for you to choose the right card.

2 Great Balance Transfer Credit Cards

The Scotia Value Visa card is particularly attractive for balance transfers, as it combines a welcome offer with a low ongoing rate. The introductory rate on balance transfers for the first ten months is 0%, and 12.99%-13.99% thereafter. There are no annual fees for the first year. A fee of 1% of the balance transfer amount applies, with a minimum of $5.00. However, this card offers no rewards.

For rewards, you could opt for the BMO CashBack Credit Card. This generous card, with no annual fee, offers 3% cashback on groceries, 1% on bill payments and 0.5% on all other purchases. During the promotion, you’ll get 5% back for three months and a welcome interest rate of 0.99% on balance transfers for nine months. Please note that a fee of 2% applies to the transfer amount.