The double-edged sword of balance transfers

Credit card companies will sometimes offer no interest on balance transfers for six months to a year, in hopes of attracting new customers. In theory, it's a win-win: you transfer a high-interest credit card balance to the new card, then pay it off interest-free, and the card company gets a new customer.

However, financial experts say a balance transfer deal could be a gamble if you don't have a plan to pay off the balance in the 0 per cent interest time frame, or if you can't stop spending on the high-interest card.balance-transfer

Have a plan to pay or get hit hard
The best way to take advantage of a balance transfer credit card is to wait for a promotion that features 0 per cent interest with no balance transfer fee.

"The purpose of doing a balance transfer should be to get ahead of the payments and pay down the balance because you have been given a reprieve on interest," says Charmaine Huber, a certified money coach from Money Coaches Canada servicing Simcoe County and the York Region of Ontario.

However, 0 per cent interest balance transfer offers are hard to find in Canada, and even if there is one with a lower interest rate, you'll likely face a transfer fee, typically 1 to 5 per cent of the transferred debt. You can still transfer the balance, of course, but unless it's significantly lower than the one on your previous card, it's really not worth it, especially if there is a fee involved.

You should also be wary of transferring your balance if you're doing it because you can't keep up with payments, says Ben Sharma, assistant vice president at Kunjar Sharma and Associates Inc., a bankruptcy trustee and administrator based in Toronto.  If you're already relying on your credit card for essential expenses or are charging excessively to your card, you shouldn't use a balance transfer to enable your bad credit habits.

"Balance transfers make sense in a very specific circumstance," says Sharma. If you have a high balance and the only thing holding you back from aggressively paying the balance is the high-interest treadmill, then it's a good choice for you.

But if you can't pay the balance in the 0 per cent interest period, or you're simply taking advantage of the promotional interest period to be able to rack up purchases on yet another credit card, balance transfers aren't for you and may lead to even bigger problems.

"If you're using one credit card to pay off another - and this sort of thing can happen - that can be viewed as an offence under the Bankruptcy and Insolvency Act, where essentially people are continuing to run up debts while they are actually insolvent and unable to pay their bills as they come due," says Sharma.

Multiple cards with multiple balances aren't the only problem you may run into. If you're not diligent enough in paying back your balance before the promotional period expires, you could be right back to paying an average of 20 per cent interest on every payment.

Finally, "if your balance is more than 70 per cent of the credit limit on this card, it will also negatively affect your credit score, as the credit rating agencies would see this high ratio of money-owing as a possible repayment risk," says Huber.

Consider other options
Balance transfer credit cards aren't very popular in Canada, mainly because Canadian credit card divisions tend to behave differently from their American counterparts.

"I lived for most of my 20s in the U.S. before coming back home, and I noticed it was a lot easier to get a really, really high credit card limit in the States than it was in Canada," says Sharma.

To add to that, the low- or no-interest periods tend to be very short in Canada, making it difficult to find a deal that will actually help you pay down your debt before the introductory offer ends. Thankfully, there's a way to pay down your balance at a lower interest rate without the looming time limit.

"It may be a better idea to transfer a balance to a line of credit, simply because a line of credit will not go from 0 per cent to 20 per cent after six months," says Huber.

A line of credit ensures that you'll pay a lower interest rate on an ongoing basis as your regular rate. You simply need to have good credit and demonstrate to your bank through tax fillings that you can in fact pay back the balance once it's transferred.

You also may be able to talk to your credit card issuer and get a better deal on your existing card.

"Very often the credit card companies, especially the banks, are willing to do that because they know if ... a person ends up in a position where they have to do a consumer proposal or declare bankruptcy, the bank will get far less," says Sharma. "I have seen collection agencies offer settlements in that way."

If you do transfer a balance, know all the terms
If you're confident a balance transfer could work for you, it's important to still use caution and fully understand the terms of the transfer before entering into any kind of agreement.

"A balance transfer could get you in trouble if you don't understand the terms of the transfer," says Huber. That includes the transfer fee, or interest charges on new purchases - which are not advisable - or existing balances.

"Sometimes the promotional 0 per cent interest rate only applies to the balance you are transferring," says Sharma. "Other times, it also applies to whatever additional charges you run up on the card, but that would be dependent on the terms and conditions of the transfer."

See related: 5 factors in choosing a debt consolidation plan, 4 common debt consolidation mistakes
Published October 27, 2016

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