The dos and don'ts of credit card balance transfers
By ATB Financial 16 October 2019 3 min read
Credit card balance transfers offer you a way to borrow money from your credit card at a special, limited-time low rate. You can take advantage of balance transfers in a few ways:
- Filling out the balance transfer section of a new credit card application
- Requesting balance transfer cheques from your credit card company and using them to write a cheque
- Calling your credit card company to make a balance transfer over the phone.
Because balance transfers often feature much lower interest rates than your normal credit card, they can be a useful financial tool—as long as you use them wisely.
Here are the dos and don'ts of credit card balance transfers:
...use them to pay off a high-rate credit card.
This is a great option if you're signing up for a low-rate credit card and want to pay off and close that old high-rate card. Simply fill out the balance transfer portion of your application. If you're doing this after you already have your new card, you can request cheques from your credit card company, make the cheque out to yourself, deposit it, and pay that card off electronically, or make the balance transfer cheque out to your old credit card company and mail it to them. Another option is to call your credit card company and complete the balance transfer over the phone.
All of these options will move that balance over to your new low-rate card and save you money on interest.
...factor in the transaction fee when moving your debt from one credit card to another.
Banks usually charge a transaction fee if you use a balance transfer to move your debt over to their card. This fee is typically 1–5 per cent of the amount of debt you transferred. Make sure you check the fine print before you complete a balance transfer.
...use them to make a big purchase or cover an unexpected expense—as long as you can pay it off in 3 months or less.
Balance transfer cheques usually have really low interest rates—sometimes as low as 0 per cent—but only for a limited time. If you use them to make a purchase, you will benefit from that low rate until it expires. As long as you pay off that debt before the rate expires, you'll be able to borrow the money for very low (or no) interest.
...use them to contribute to your RRSP or TFSA.
If you want to max out your contribution, make the cheque out to yourself, deposit it into your bank account, and then transfer that amount to your investment.
...pay off the borrowed amount before the special low rate expires.
This is the most important "Do". That promotional low rate won't last forever, so if you're using balance transfer cheques for a special reason—and not just moving debt to a low-rate card—be sure to pay off the amount on the cheque before the low rate expires. If you don't, you'll be charged the normal interest rate, so you might as well just use your credit card.
...transfer more than your credit limit.
Balance transfer cheques are an extension of your credit card, so you can't use them to borrow more than your credit limit.
...miss your minimum monthly credit card payments.
If you miss one payment, you'll lose your special balance transfer rate and will be bumped up to your normal credit card rate.
...use them to make a big purchase you can't afford.
The only time you should use balance transfer cheques for a purchase is if you can pay off the borrowed amount before the special rate expires. If you can't commit to that, then you should consider other lower-rate borrowing options, like a personal loan.
...forget that only the amount you transfer is eligible for the special rate.
So if you use the balance transfer cheque to move $2000 in debt from your old high-rate credit card to a low-rate card, and then you buy a couch for $1200 with that low-rate card, only the original $2000 will benefit from the special low transfer rate. Your other purchases are charged at your normal interest rate.
If closing out some high interest credit cards or buying a big-ticket item is on your to-do list, consider using a credit card balance transfer. Maybe you can put it to good—and smart—use.