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Is a balance transfer the right strategy during COVID-19?

As the COVID-19 pandemic unfolds faster and more dramatically than any of us could have anticipated, many Canadians have found themselves suddenly and unexpectedly out of work. With non-essential businesses shuttered in most provinces and government benefits providing some but not necessarily all the support you need, you might find yourself relying on your credit card to make ends meet and wondering what options you have to save on interest.

One way to stave off credit card interest charges in the short term is to use a balance transfer credit card. For all their benefits, however, balance transfer credit cards aren’t a simple fix to avoid all interest payments and there are caveats. Using a balance transfer can be worthwhile as long as you know exactly how they work and have a plan in place to pay off your debt. 

Not sure if a balance transfer credit card can help you? We’ve got the answers to your questions about using this financial tool during the COVID-19 pandemic.

What is a balance transfer?

A balance transfer involves moving a balance you owe on one credit card to another, with the goal of paying off your debt at a lower interest rate.

You can move a balance you owe on your current credit card over to a new balance transfer card and pay it off at a rock bottom interest rate (typically 0% – 3.99%) for a limited time (anywhere from six to ten months; it all varies by card). Done right, a balance transfer card can help you save hundreds of dollars on interest – depending on the size of your balance.

There is a caveat though.

The low promotional interest rate offered by balance transfer credit cards only applies to balances you moved over from your previous credit card or cards – not on new purchases you make. Simply put, a balance transfer card is primarily designed to help you address balances you’ve already racked up and not new debt you anticipate you’ll be taking on.

If I’m facing financial hardship, is a balance transfer credit card my first and best option?

If your income has been reduced due to COVID-19 and you’re facing a cash crunch or having trouble paying your credit card bill, the absolute first step you should take is to reach out to your bank for support.

In the wake of this pandemic, all of the major banks are providing some form of relief for cardholders facing financial hardship. Credit card issuers are offering payment deferrals for up to six months, interest rate cuts, and no penalties for skipping payments.

Before you consider something like a balance transfer, let your bank know you’re facing financial trouble and ask what options are available to you. Call volumes are high due to the COVID-19 crisis, so use your bank’s app whenever possible to schedule an appointment with a customer service representative or request a deferral. 

Remember, a balance transfer credit card can help you save on interest and pay off previous debts faster, but won’t help you address new balances. You’ll also need to have the financial means to make your monthly minimum payments.

Check out the guide to COVID-19 – Personal finance during COVID-19

How long does a balance transfer card’s promotional interest rate last?

Balance transfer credit cards offer their rock bottom interest rates for a limited period of time, usually between three to ten months, with the average being six months. During this time, the interest rate on the balance you transferred will be in the low single digits or even zero (depending on the card).

But, once the promotional period expires, the credit card’s regular interest rate will kick in and your balance will accumulate interest at a higher rate – which is why it’s a good idea to pay down as much of the balance as possible before the promotional period ends. If you’ve been laid off or working fewer hours, that might be tough. It all depends on whether you have money set aside to pay down your debts or think that money is better used to cover your more urgent day-to-day purchases.

Do I have to make minimum payments on my balance transfer credit card?

Ideally, you’d have a plan in place to pay off the entire balance on your credit card before the balance transfer promotional period ends. Still, at the very minimum, you need to make minimum payments on a balance transfer credit card, just like any other credit card.

If you don’t, you might lose access to the low promotional interest rate, and your transferred balance will be subject to the credit card’s standard interest rate. You’ll also hurt your credit score by missing payments. This is why a balance transfer might not be the best option if you’re in a cash crunch and don’t have the money to set aside to meet your monthly minimum payment obligations.

Do I have to transfer my balance right away?

Some credit cards need you to transfer your balance immediately once you get the card, while others may let you wait up to 90 days after you’re approved to transfer a balance. If you plan on transferring a balance, make sure you don’t miss the offer deadline.

Are there fees to transfer a balance?

Some balance transfer credit cards charge a transfer fee that is calculated as a percentage of the total balance you moved over. This flat fee is usually between 1% to 3%. That means if you’re transferring $3,000 to a balance transfer credit card, you could pay a transfer fee of between $30 and $90. This fee is usually added to your total balance.

Can I use my balance transfer credit card for everyday purchases?

It’s not a good idea to use your balance transfer credit card for everyday charges because your new purchases will accumulate interest at the credit card’s standard rate, not the low promotional rate. Also, any payments that you make towards the balance transfer credit card will go towards paying down your transferred balance first, which means your new purchases may accumulate quite a bit of interest in the meantime.

A better strategy would be to use your balance transfer credit card just once – to transfer that balance – and then use another credit card for your everyday purchases.

When is a balance transfer credit card a good idea?

Balance transfer credit cards can be an excellent way to pay less interest on your credit card debt as long as you have a solid plan in place to pay off as much of the balance as possible before the promotional period expires and have the cash on hand to make minimum payments.

If you aren’t sure you’ll be able to pay off the balance, for example, if you were laid off from your job due to COVID-19, you’ll want to consider whether a balance transfer is really the best move for you right now. 

Bottom line

The COVID-19 pandemic has been developing rapidly around the world. If you’ve suddenly found yourself dealing with unemployment and the associated credit card debt that comes with it, you aren’t alone. While your first course of action should be to reach out to your credit card issuer for support, balance transfer credit cards may be a useful tool. Make sure you’re aware of the terms, have a repayment plan in place, and have the financial means to at least make the minimum payments every month. And remember, if you’re planning to use a balance transfer credit card for new purchases, keep in mind that those charges will be subject to the credit card’s usual interest rate.

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