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What is a Balance Transfer and How Does it Work? 9 Things You Need to Know

If you’ve been carrying a credit card balance and you’re looking to reduce the amount of interest you’re paying and clear off your debt faster, a balance transfer can help in a big way.

1. What is a balance transfer (and what are its advantages)?

A balance transfer is what it sounds like: it’s the transfer of a balance from one credit card to another. The goal is usually to move your outstanding debt from a card that charges a high-interest rate to a new card with a far-lower interest rate, and in the process, pay off your balance faster by having more of your money go towards the principal of your debt while losing less to interest.

Simply put, it’s like you’re using a new card to pay off an older one faster.

A balance transfer is a popular strategy for addressing credit card debt, and when involving the right balance transfer credit card, can help you save hundreds (or in some cases, thousands) of dollars in interest over the long term.

If you owe money on multiple credit cards, a balance transfer can also help you stay on top of your debts by consolidating all your balances onto just one card. So, instead of having to juggle several card statements every month (each with their own billing cycles, due dates, and dollar amounts), you’ll have just one balance to keep track of and pay.

2. The important role of balance transfer offers

To take full advantage of this strategy, you’ll want to transfer your high-interest credit card debt to a balance transfer credit card. These cards come with special promotions that let you pay an ultra-low interest rate (sometimes as low as 0%) for a limited period of time, usually around six to ten months.

Balance transfer cards provide an excellent opportunity to make a real dent in your debt because more of your payments will be going towards the principal. A balance transfer credit card with a super-low rate of 0%, like the MBNA True Line Mastercard, gives you the opportunity to pay down your debt faster versus a high-interest credit card charging 19.99%.

Card details

  • No annual fee
  • Cardholders could get a 0% promotional annual rate on balance transfers (plus a 3% fee or a minimum of $7.50) for the first ten months. 12.99% rate applies thereafter
  • 12.99% purchase interest rate
  • Around the clock protection against fraudulent charges
  • Note: Balance transfer offer and fixed interest rate varies for residents of Quebec

To put into perspective how much you could save with a balance transfer, here’s an example using the MBNA True Line Mastercard: If you were to transfer $4,000 onto this card, you would pay a $120 transfer fee and that’s it for ten months. In contrast, if you kept this balance on a card charging 19.99% interest, you would pay around three times more (roughly $370) in interest charges if you paid off the balance within the same ten-month period.

3. Remember, balance transfer offers are only available for a limited time

It’s important to reiterate that balance transfer offers aren’t permanent and are only offered for a limited period, after which the card’s regular interest rate will come into effect. For example, the MBNA True Line Mastercard, currently the best balance transfer credit card in Canada, offers a 0% balance transfer offer for a limited period of ten months. After this ten-month period ends, the promotional interest rate of 0% expires and any remaining balance will be subject to the credit card’s regular interest rate, which in the case of the MBNA True Line is 12.99%.

The promotional nature of balance transfer offers means it’s important to keep an eye on when your transferred balance will be subject to the regular interest rate and to try to pay it off before the promotional period ends. It’s also important to pick a balance transfer card with a low regular interest rate, so if you do need more time to clear off your debt, you can still be in a position to save in the long run. For example, the MBNA True Line’s regular interest rate is 12.99%, which while much higher than its 0% offer, is still considerably lower than the typical credit card interest rate of 19.99%.

4. How do balance transfers work?

You can often request for a balance transfer online through your bank’s website or app, but depending on the bank, you may need to dial the phone number on the back of your card and speak with a customer service representative in person to get it done.

When requesting a balance transfer, you must provide the account information of the card you’ll be moving the balance to as well as the amount you want to transfer. The amount you can transfer can be no larger than the credit limit of your new card. For example, if you want to transfer a $3,000 balance to a card with a credit limit of $2,000, you won’t be able to transfer the full amount.

You can transfer balances between credit cards from different financial institutions, but in most cases, you can’t move balances between cards from the same bank. You’ll usually have to pay a balance transfer fee as well (though, it’s typically a nominal 2% or 3% of your transferred amount). Lastly, moving a balance isn’t instant and may take upwards of seven to ten business days for the proper approvals to go through and the transferred balance to appear on your new card.

5. Transferring a balance is not the same as paying off a balance

Remember, simply transferring a balance onto a balance transfer credit card won’t get rid of your debt. Instead, you’re moving your debt from a high-interest credit card to a low interest credit card. That means, while it is easier to pay off your debt because the interest rate is significantly lower, it still needs to be paid off.

You should make a concerted effort to take advantage of the low interest promotional period to make progress in paying off your transferred balance before the interest rate rises.

6. New purchases on a balance transfer card will be subject to a higher rate

While balance transfer credit cards are a great way to reduce the interest you pay on past purchases, that’s not the case with new purchases. When you charge new purchases to your balance transfer card, they won’t be subject to the special promotional interest rate; they’ll be subject to the credit card’s regular interest rate instead.

For example, using the MBNA True Line Mastercard, if you make a new purchase on this credit card, that purchase will be subject to the card’s regular interest rate of 12.99%, not the promotional rate of 0%. For this reason, it’s a good idea to avoid charging new purchases to your credit card while you’re paying off your transferred balance.

Further to this point, any payments you make towards your credit card bill will go towards paying off your transferred balance first and not new purchases. That means you’ll have to completely pay off your old transferred balance before you can chip away at a new balance you’ve racked up from recently-made purchases.

Remember, the goal of a balance transfer is to help you pay off older debts. So, until you’ve wiped out your old debts, you’ll want to tread carefully and avoid using credit to make new purchases.

7. Is a balance transfer worth it?

If you have a credit card balance that you’re struggling to pay off, a balance transfer can be an excellent way to temporarily reduce your interest rate and pay off your debt quicker. You could easily save hundreds of dollars in interest charges by taking advantage of a balance transfer.

Balance transfers are always worth it if you’re transferring a balance that you’re confident you can pay off during the promotional period, and at the same time, you’re sure that you won’t charge new purchases to the card.

That said, there are some scenarios when a balance transfer may not be worth it. If you have a low credit score, for example, you may not be approved for a balance transfer credit card in the first place. Second, while some rewards credit cards come with balance transfer offers, their interest rates will increase sharply to 19.99% after the promotional period. So, if your transferred balance is larger than you can pay off during the promotional period, you should avoid rewards cards with balance transfer offers and instead consider a low interest card (like the MBNA True Line) that has a low regular interest rate even after its balance transfer offer ends.

8. How does a balance transfer affect your credit score?

A balance transfer can generally help to improve your credit score over the long term. That’s because a balance transfer can help you pay back your outstanding credit card debts much faster, which in turn, can reduce your credit utilization ratio. One of the biggest determinants of your credit score, credit utilization refers to the amount you owe on your credit card relative to your total credit limit, and typically the lower this ratio, the better your score.

In the process of undergoing a balance transfer, however, you may face a few negative (albeit, temporary) dings to your credit score. For example, when applying for a new balance transfer credit card with a low interest rate, you’ll receive an inquiry on your credit report.

Overall though, applying for a new balance transfer card won’t have a lasting impact on your credit report and your score can fully recoup in a few months provided you make payments on time. Not to mention, by reducing your utilization ratio with a balance transfer, you’ll be on track to save money and improve your overall creditworthiness in the long run.

9. What to watch out for when using a balance transfer credit card

Balance transfers are a good option to pay down your debt faster, but it’s important to read the fine print and be aware of the limitations of these credit cards. Here are several considerations to keep in mind:

  • Promotional rates don’t last forever: Balance transfer promotional interest rates are usually available for a set period of between 6 and 12 months. After the promotional period ends, the remaining balance will be subject to the regular interest rate, which may be higher than your current credit card.
  • Additional fees: Most balance transfer credit cards will charge a balance transfer fee equal to a percentage of the transferred balance. Sometimes that fee can be as high as 3%, so it’s important to consider this fee along with the promotional interest rate when deciding whether a balance transfer is worth it.
  • No rewards: Most credit cards, even those that offer rewards on everyday purchases, will not offer rewards for transferred balances. Since your goal when transferring a balance is to achieve a lower interest rate, not earn rewards, this isn’t a deal breaker.
  • Credit scores: Some balance transfer credit cards require very high credit scores, which may exclude your application.

If you’re carrying a balance on your credit card that you’ve been meaning to pay off, transferring your balance could be an excellent way to jump-start your debt repayment and save you several hundreds of dollars in interest charges. Just keep in mind that a balance transfer credit card’s low interest rate is only available for a promotional period and that some credit cards charge additional fees to transfer a balance.

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