Debt consolidation is essentially the process of combining multiple debts into one. The goal is often to reduce monthly payments and the total interest accumulated on your outstanding debt. As a result, it should become easier to pay off your debt and thus also improve your credit score. Consolidating your debt can include combining debt from credit cards, car loans, lines of credit, and mortgages.
Let’s assume you have two credit cards with balances on both of them. One charges 17.99% interest and the other charges 19.99% interest. We’ll say you have a $1,000 balance on the first card and $5,000 on the second. If you were to try to pay this debt off in one year, you’d need to make monthly payments of $551.01 and pay $612.12 in interest. It’s easy to see that as your debt accumulates, the interest on these cards can add up quickly. However, if you consolidate this debt to a balance transfer credit card, you may be able to pay off this debt more quickly and at a lower cost.
A balance transfer credit card offers an extremely low introductory rate, which will provide you with the opportunity to pay off your debt with one monthly payment and a lower rate of interest.
Here are two of our favourite cards:
The MBNA Platinum Plus MasterCard is a great option for those looking to pay off their debt in one year. The card offers a 0% APR (annual percentage rate) for the first 12 months on the account. This means that when you transfer your debt to this credit card, you won’t be charged interest on your balance transfer for the first year. This is a great opportunity to reduce your debt significantly.
This MasterCard credit card also offers no annual fee. This is yet another way you can save money and reduce your debt. One thing to watch is that you’ll be charged a 1% fee or $7.50 (whichever is greater) on all balance transfers you make. If you make transfers of less than $750, you’ll actually pay a fee of more than 1% so try to transfer your debt all at once rather than making multiple transfers.
With 0% interest for 12 months and no annual fee, it’s easy to see why the MBNA Platinum Plus MasterCard is considered a top balance transfer credit card for Canadians.
The SimplyCash Card by American Express also has 0% annual interest on balance transfers. However, the offer is only available for the first six months. This card is a great option if you think you can pay off your debt within the six-month period.
It also has the added benefit of earning 5% cash back on eligible purchases at restaurants, grocery stores, and gas stations for the first six months (up to $250). You’ll also earn 1.25% cash back on all other purchases and after the welcome rate ends.
One thing to keep in mind with any balance transfer card is to avoid making purchases until your balance is paid off in full. Otherwise, you’ll end up paying the regular interest rate on future purchases and end up accumulating debt again.
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- The Best No Annual Fee Credit Cards in Canada for 2016
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