Wednesday, March 26, 2014


You've been working on getting your finances in order, paying down your credit cards and following your monthly budget plans, month after month. One day, you notice that your low-interest credit card has more credit available on it than you have debt on your high-interest in-store card. Would it make sense for you to move the store card debt onto the low-interest card?

Or you have a few thousand dollars on a credit card with 12% interest, and one day you receive an offer in the mail of a card with 4% interest as a teaser for six months and some transfer cheques helpfully included in the envelope. Would it be in your best interest to take advantage of the offer?

The short answer is: "maybe."

Here's the longer, more actionable answer.

A balance transfer is one of the easiest concepts in personal finance to understand. It means that you move ("transfer") the debt carried ("balance") from one credit card to another one.

Usually, this is done for one or both of two reasons:
1) To save money on interest, or
2) To simplify the paying of bills.

In order to save money on interest, the card onto which the balance is being transferred needs to have a lower interest rate than the original card had. Also, if the bank charges a fee for the transfer (some do, and some don't), you'll want to be sure that the fee won't be higher than the amount of interest you'd expect to save over the long term. It's pretty rare for the fee to be high enough for a transfer not to be worth it.

The question can get tricky if you are opening a new account that has a temptingly low "teaser" interest rate. These teasers are meant to tempt you into switching to the new card, but the rates only stay low for a limited amount of time. That period might be six months or a year. After that, the interest rate will return to a more normal, much higher credit card interest rate, often in the double digits. Can you pay off the balance before the teaser period ends and the rate hikes up? Will the higher, non-teaser rate still be lower than your current rate? If the answer to one or both of these questions is "yes," you're good to go.

Sometimes, you'll receive "balance transfer cheques" in the mail, to encourage you to transfer your balance from other cards to the card the cheques are for. The cheques make it easy and convenient to transfer all or part of a balance. Quite often, the cheques even have their own incentive such as a reduced interest rate or a waiver of the transfer fee. Read the fine print, though, because there isn't always an incentive with them other than the convenience.

By now, you're probably wondering what the bank gets out of this. Why would they want you to transfer to a card with an unusually low rate? They are counting on you not paying off the balance before the rate goes up. Most people don't. They also figure that there is also a good chance that you'll put more debt on the card, for which the bank earns interest. Of course, it's possible that you'll pay off the debt and not add anything to it. That's a chance the bank is willing to take.

When considering whether to transfer a credit card balance, you need to do a bit of number-crunching. Figure out how long it will take to pay off the balance and then how much interest you will save in that time. Is it more than the transfer fee? If so, transferring your balance is probably a good move. If it means you also only need to pay one bill instead for two or more every month, it is so much the better.

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