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If you're struggling to pay down your credit card debt, it may be tempting to apply for another (ideally lower rate) card which you can transfer your balance to or take advantage of special promotions offered by your bank. The process of using one credit card to pay off another is called a balance transfer and it could
potentially be beneficial. However, I recommend you shop around before moving forward.
What You Need to Know
Much like buying shoes, you'll have a variety of credit products to choose from. And just as you wouldn't buy a pair of high heels to run a marathon, you'll want to make sure the card you select will assist your goal of paying off the balance as quickly as possible.
Balance Transfer Fees – There will almost always be a fee to transfer the balance from one credit card to another. This is usually a percentage of the total amount you're transferring. For example – if you transfer $1,000 at a 3% fee, the total transfer will be $1,030.
Interest Rates – To make the transfer worthwhile, you'll want your monthly payments to be lower than what you're currently paying. Check that the interest rate of the new card is currently and will remain lower than what you're paying right now.
If you're offered a 'promotional rate' on a new or existing card, check how long that rate is valid for. Terms of six, nine or 12 months are common. If this is the case, ensure you can either pay the balance off by the end of that term and / or that the regular rate is not higher than your current rate.
(Note: Some banks may charge the balance transfer as a cash advance once the promotional term expires, which can be up to 5% higher than the purchase interest rate on the card.)
Annual Fees – Many credit cards have annual fees which can be anywhere from $100 to $1,000 per year (or $8 to $80 per month). These are especially common on cards with low interest rates or rewards. Make sure that added cost doesn't offset anything you may be saving in interest.
Read your credit card agreement carefully. Federally legislated institutions such as banks must include an information box on the application form which clearly displays key features such as interest rates, fees and other charges.
Extras – Compare your existing card with the card you're transferring to. Are there any special features you're giving up such as travel rewards, merchandise points or cash back? If so, does losing these features offset the potential money you'd be saving in interest each month?
Choosing the Right Card
The Financial Consumer Agency of Canada offers a
helpful credit card selector tool which can assist you in finding the right card for you. Simply enter the qualities you require in a credit card and the tool will present options from a variety of institutions which you can compare directly.
Paying off the Debt
Don't forget why you went through this process in the first place. Once the balance transfer is complete, immediately cut up the old credit card to avoid using it again and accumulating even more debt.
Next, outline your plan for paying off the new card. Write a budget and track your spending. Remember, you won't get ahead by simply transferring your balance to a new card – you'll need to change your behaviours too.
Life Changing Debt Solutions
Unfortunately, not everyone is eligible for a new card or balance transfer. But know that you still have options. During a Free Confidential Consultation, a Licenced Insolvency Trustee will review your entire financial situation and help you understand the ones available to you.
Whether you qualify for a Life-Changing Debt Solution such as a
Consumer Proposal or might benefit from a consolidation loan or budgeting help, your Trustee will present all the information you need to make the most well-informed and strategic decision to achieve a financial fresh start and eliminate your debt for good.
Based out of Prince George,
Leah Drewcock is a Licensed Insolvency Trustee and Vice-President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 1.877.898.2580 or toll-free at 310.DEBT (310.3328).
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*310-DEBT doesn’t operate in MB, NW ON and QC.
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