Be cautious about credit card balance transfers

During this economic downturn, many Canadians are experiencing difficulty paying down their credit card debt. In an attempt to capitalize on this situation, companies are offering new balance transfer credit cards with low introductory rates.

This may seem like a great idea: Balance transfer credit cards can take the amount you owe on one credit card set at 20 percent interest, for example, and transfer it to their own, which may be set at 6 percent interest. But if you take a closer look, there are many reasons to be cautious when making credit card balance transfers.

Credit card balance transfers: A closer Look
First, be sure to find out for how long the low APR credit cards' introductory rates are being offered. It may only be for a short time. If you cannot pay down the balance transfer credit card's debt in that time, then you might be stuck with a higher rate than you already have. It is also important to realize that the balance transfer process is not always immediate. It can take three weeks or longer. During that time, you may have to make the minimum payments on your old card and your new card. Before you sign up for a balance transfer from one bank to another, ask your own bank if it offers low APR credit cards for balance transfer. Some banks do not impose fees for balance transfers from one credit card to another within their own bank.

Also, investigate any low APR rate as it may only apply to the balance transfer amount; the rate may be substantially higher for any new purchases you make. It is also wise to limit the number of balance transfer credit card accounts you open. When multiple creditors look into your credit history, it can cause your credit rating to drop.

Credit card balance transfers: For a minority of consumers?
"Most Canadians pay zero interest on their credit cards because, according to Statistics Canada, 73 percent of us pay off our balances each and every month," says Nancy Hughes Anthony, president and CEO of the Canadian Bankers Association. If you are one of the 27 percent who carry a balance each month, decide whether you can realistically pay off the debt during your balance transfer credit card's low introductory offer time period; if you can, then a balance transfer to a new credit card could be a helpful option. But if you're just making minimum payments, there may be other options you should consider such as getting a loan from your bank to purchase your debt. In that case, the minimum payments you were paying to credit card companies to stay afloat can be used to pay down the principal on your debt.

Take the time to shop around for the balance transfer credit card that is best for your financial situation, and be sure to always read the fine print. For more information, there is a helpful online guide from the Financial Consumer Agency of Canada called "Credit Cards and You."
Updated May 22, 2009

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