Since I’m getting organized around my family’s budget and spending in 2014, I heard that I should keep an eye out for a 0% balance transfer credit card. To be honest, when I first got a credit card I just applied for the first one that I could find. Since then, I’ve signed up for a couple of others but it’s mainly been when I notice a good rewards program being advertised.
For the most part, I pay off my credit cards on-time but after the holiday season I had, I had to leave a balance on my card the past couple of months. This got me thinking about lowering the amount of interest I’m paying and the various options – enter my thoughts on a 0% balance transfer card.
Balance Transfers 101
From a bit of research I did, I found out that a credit card balance transfer occurs when someone opens up a new credit card account and uses the available credit to pay off another credit card. Many people use credit card balance transfers as a way to take advantage of a lower interest rate, or to consolidate multiple credit card bills into one easy payment.
Credit card companies offer low interest balance transfer rates as a marketing tool to bring in more customers and more accounts. The credit card company agrees to move your existing high interest credit card debt to a new account with an attractive low interest or 0% rate for a set period of time. So, I was wondering what the catch was for the credit card company – are they really giving me a good deal or are they gaining something.
Well, this type of promotion has actually proven to be extremely profitable for credit card companies because oftentimes, consumers will not end up paying off their debt before the promotional interest rate expires. Then I won’t really be any better off as I’ll have accumulated more debt and then have a new interest rate to deal with!
However, if I do pay it off during the introductory period, this balance transfer could be an excellent way of lowering my debt. More of my money will go towards reducing the principal balance on the credit card, without incurring additional interest charges.
How find a low interest balance transfer
It isn’t hard to find a new credit card that offers an enticing balance transfer option — usually at 1% to 3%. It is a bit more rare but still achievable to find a card at 0%. I also learned that I’d have to take into account that most transfers will be charged a fee that will be applied — usually between 1% and 5%, and it is based on the amount of money you plan on transferring. For example, if I wanted to transfer the $5,000 I owe on my current card to a new one that charges a 3% transaction fee, you would be charged $150 for the transaction. Experts also suggest that if someone is considering a balance transfer, it’s very important to always make your monthly payments on the credit card. I do this anyway but at least it’s good to know that so I don’t accidentally do it!
The reason for this is that most cards will automatically increase the Annual Percentage Rate (APR) by up to 5% if one is late more than once within 12 consecutive billing cycles. Additionally missing payments might make you ineligible for the promotional rate. So, if that happened, there wouldn’t be any point in transferring, would there?
Considering a balance transfer card
I sat back and considered all of the words of wisdom from my research and realized that I needed to develop a plan before I found a card and agreed to the stipulations of the transfer. First, I needed to see what options were available – is it low interest or 0%, how much is the admin fee? All of these aspects will factor into the picture. Then, I needed to look at my existing debt and figure out how much of it I wanted to transfer. Then, I could divide that amount by the number of months the promotional period lasts for. For me, I’m looking to transfer about $2,500 so if the 0% interest rate was on for a 6-month period, I’d have to pay just under $420 a month to pay off that debt. Also, I decided that if I did this I’d focus on paying off the debt first so I didn’t accumulate more debt on the card, and then once that’s been paid off I could use the credit card as normal. The last thing I’d want is to end up with more debt than I started with.
After a lot of thought and consideration, I decided that finding the low interest or 0% balance transfer card would be a good idea. What made me feel confident about it was the fact that we can afford the monthly payments and my current level of debt isn’t too high. This way I’ll be able to pay back what I owe without the worry of having to pay extra interest. Who wants to pay extra if they don’t have to?
Finding the lowest balance transfer
Now that I took that first step, I needed to start shopping around. Since I’ve had a decent relationship with my bank, I started by looking at the credit cards my own bank was offering – surprisingly, I don’t have any credit cards right now that are from my bank. Unfortunately none of them were offering a good balance transfer promotion, so I had to move on with my search. I also made a point of paying attention to some of the advertisements I’d seen online and in the mainstream media. A 0% balance transfer IS a good deal so companies will likely talk about it if they’re offering. Another means of finding the best rate I used was to talk to go to a credit card comparison site. There are a number of sites in Canada that compare cards. The best part is that they are updated regularly so it’s easy to see if a new promotion is being offered. This is actually where I found out about the 0% balance transfer card that was being offered by one of the big credit card firms.
Once I found the offer, I followed the advice I’d been given and read all the small details detail. This card was offering a 0% balance transfer for seven months and charged a fee of 4% to move the funds over. I worked out that my $2,500 debt would cost me $357 per month and the one-time fee would be $100. Since my current interest rate is 19.99% (a fairly standard APR). The APR is an annual figure, so that equates to a monthly interest rate of this equates to approximately 1.7%. So, in 7 months, I’d end up paying at least 11.9% on $2,500 (probably more as my balance would grow month-on-month) where all I’d have to pay on it with this new card is 4% with the fee. All in all, that would save me money. After working out the math, I’m sold!
So, I go about applying for the balance transfer which is fairly similar to any standard credit card application. I’m happy to say that my good credit rating seemed good enough to be approved. Now, I’m just waiting for my card in the mail so I can activate it and begin fulfilling my plan to reduce the Christmas debt, paying as little as possible. I’ll keep you posted…