Increasingly common deals on credit card balance transfers, which offer interest-free promotional periods for new customers who shift over their debt, offer a good option for consumers facing large bills as interest rates rise.
Danyal Aslam, a card rewards expert at Ratesdotca, said he’s noticed a recent uptick in advertising around balance transfers as companies look to attract new customers during a period of economic difficulty.
Companies often provide a promotional interest rate of 0 per cent or 0.99 per cent for a set time period, usually between three and 12 months. As a caveat, they charge an upfront one-time fee, often between 1 and 5 per cent of the amount being transferred.
“It’s a great way to lock in a customer in their time of need,” said Mr. Aslam, who said institutions hope that new credit card customers could become long-term clients who eventually sign up for other products, such as mortgages or daily banking accounts.
The proliferation of these deals comes as the average consumer credit card balance grew from $3,825 to $4,185 between the second quarter of 2022 to the second quarter of 2023, according to a recent report by TransUnion. The rise in balances also led to the average minimum monthly payment increasing by 11 per cent in the same period to $104.
Credit counsellors and Mr. Aslam say balance transfers can be an effective first step in tackling your debt, but only if consumers use their interest-free periods to aggressively pay back what they owe. Experts emphasize that balance transfers only offer relief from interest – you’ll have to change your spending and debt repayment behaviour to climb out of debt.
“Unless you put a plan in place to deal with the root cause, it doesn’t address the issue to live within your means,” said Becky Western-Macfadyen, financial coaching manager at Credit Canada.
Rob Johnson, a licensed insolvency trustee for BDO Canada, based in Fredericton, said consumers who opt for a balance transfer should also close their previous credit card account to avoid the lure of spending even further into debt.
There are other caveats, too: balance transfers often require a decent credit score, so consumers with a history of missed payments may not qualify. Balance transfers can also be detrimental to your credit score in the short term. That’s because credit card companies will do a what is known as a hard inquiry, which is a detailed look into your credit score and can negatively affect it. And while closing another credit card account may help you avoid spending, it, too, can affect your score.
But for people carrying heavy credit card debt and who qualify, a balance transfer could offer enormous savings.
One calculation by Ratesdotca found that someone carrying a $5,000 credit card balance who can only afford to pay $200 a month could save more than a $1,000 by switching to a low-interest credit card that offers a 12-month, interest-free period and a 3-per-cent fee on transferred debt.
On the other hand, Mr. Aslam said clients who don’t chip away at their debt soon enough stand to lose money, since they’ll have paid the balance transfer fee and will eventually continue to pay interest on their new card.
Mr. Aslam noted MBNA as a bank with one of the best deals for balance transfers because of their lengthy interest-free period, and because of its extremely low interest rate of 12.99 per cent (credit card interest rates are often more than 19 per cent.) Mr. Aslam also pointed to BMO and CIBC as major banks that offered good balance transfer deals.
Mr. Johnson said people who are looking to take advantage of balance transfers should also try negotiating with financial institutions, many of which are fighting with each other to attract new customers.
One of the negotiable terms is the upfront fee charged on the transferred balance. If an institution is offering a 3-per-cent fee, people can often get a better deal if they demonstrate that they have a history of making on-time payments and if they can point out better deals being offered by other institutions. It could lead to hundreds of dollars saved for people with five-figure credit balances.
“The worst they can do is say no,” Mr. Johnson said.
He also warned that some credit cards tack extra charges on for consumers who don’t pay off their entire transferred balance before the interest-free period. This often appears as a “deferred” or “retroactive” interest charge, and will appear on the card’s terms and conditions.
He said consumers should avoid cards that carry this fee if they aren’t able to pay off their entire balance in the interest-free period, as they might face charges on the entire transferred balance when their promotional period is done.
In this competitive environment, Mr. Aslam said consumers need to approach multiple different institutions to see where they can get the best deal, especially as some companies will negotiate their fees.
“I think the Canadian economy is headed for rocky times, and the average consumer is going to have find opportunities to stretch their dollars the furthest or find any saving opportunities they can,” said Mr. Aslam.