Balance Transfer Credit Cards 101

A balance transfer credit card allows you to move existing debt from one or more high-interest credit cards to a new card, typically one that offers low or 0% interest for a set period.

The best balance transfer credit card is the MBNA True Line^® Mastercard^®, which offers 0% for an impressive 12 months.

Balance transfers can help you save significant money while paying down your debt. But this debt reduction strategy isn't helpful if you don't know how to use it, and there are some pitfalls to watch out for. This guide will help you understand the ins and outs of balance transfers, how to get started, and how to choose the right card for your needs.

What is a balance transfer and how does it work?

A balance transfer takes place when you open a new credit card with a promotional balance transfer rate and move all your existing credit card debt to the new card.

During the promotional period, your credit card balance will be charged very little, if any, interest. This gives you a window of time to focus on paying down your debt.

You also might find it easier to make payments, since instead of making several payments for multiple cards, you’ll streamline the debt and have just one monthly payment to worry about.

Important: You can’t open a balance transfer card with the same card issuer as your existing credit cards.

How much can you save with a balance transfer?

It’s hard to put an exact figure on how much you’ll save since it depends on how much debt you have, your current interest rates, the promotional balance transfer rate, and how quickly you can pay off the debt.

Still, looking at an example helps. Let’s say someone has two credit cards that both have 19.99% interest rates and a total of $4,000 in debt. Every month, they pay $400 towards the combined balance. At that rate, it would take 12 months to pay off both cards and they’d pay $411 in interest.

Now, let’s imagine they open a balance transfer card that has a 0% promotional interest rate for six months (before switching to a 12.99% balance transfer rate). There’s also a 3% balance transfer fee. With the balance transfer, they would pay off the debt in 11 months and only pay a total of $171 in interest—a savings of $240.

How to do a balance transfer

At first, balance transfers might seem like a lot of effort, but they’re worth it if it means you can pay down debt and save on interest. Here’s what you need to do:

1. Apply for a balance transfer card

Check out Canada’s best balance transfer cards or find out if you can do a balance transfer with one of your current cards through a promotion (although you shouldn’t do this if the card already has a balance).

Once you’ve found a card that meets your needs, submit an application. You should find out pretty quickly if you’re approved, and the card issuer will outline any next steps.

2. Decide which balance to transfer first

If you only have one credit card with a balance, that’s obviously the debt you’ll transfer. But if you have multiple cards, start by moving the debt that has the highest interest rate. Calculate the transfer fee to make sure you’re saving enough to be worth it.

You should also check the credit limit on the new balance transfer card to ensure you have enough room to move the debt. Be aware that the balance transfer fee counts toward your credit limit.

3. Initiate the balance transfer

Sometimes, you can start the transfer during the application process. Otherwise, it begins once you’re approved and have specified which debt you want to move. Essentially, the new credit card pays off the balance of the old card.

You’ll typically make a balance transfer requisition online, in your issuer’s app, or over the phone. Depending on your issuer, you may be able to use balance transfer cheques made out to the credit card company.

4. Wait for everything to process

Again, it depends on the card issuer, but your balance transfer could take a few days to a few weeks to process. Once it does, you’ll see that the old account is paid off and your new credit card will show the balance of the debt.

5. Pay down your balance

As soon as your debt shows up on the balance transfer card, you’re on the clock! You’ll typically only have a few months to a year to take advantage of the low promotional rate period. This is when it’s crucial that you make payments, since more of your money is going toward the principal instead of interest.

After the promotional period ends, the balance transfer interest rate will kick in. Since these are typically higher than the standard purchase interest rate, you should continue to prioritize repayment, so your balance doesn’t grow.

Pros and cons of balance transfers

Balance transfers have a lot of benefits, but there are some serious drawbacks to think about before committing to one.

Pros:

• You can save a substantial amount in interest
• Consolidating debt makes it easier to manage
• You’ll reduce your credit-utilization-ratio, which can bump up your credit score
• You may feel better knowing you’re taking positive steps toward paying off debt

Cons:

• Some credit cards charge hefty fees to transfer debt
• You may be tempted to spend more since you have access to new credit
• Missing payments could result in large fees
• Your credit score will temporarily dip a little after applying for a new card

Most of these cons are only applicable if you don’t use the balance transfer card responsibly. That said, if you have a debt management plan in place and you’re resolved to stick to it, a balance transfer card can be a valuable financial tool.

Who should do a balance transfer?

A balance transfer is a fantastic strategy for someone who has a clear plan for paying down their debt. Maybe they’ve just gotten a job with a better income and will have more resources for paying off credit card debt, or maybe someone is tired of paying multiple credit cards and wants to get a handle on their finances.

However, just because you can do a balance transfer doesn’t necessarily mean you should. If you know money is still very tight, and you plan on making new charges to the credit card (or your old credit cards), it defeats the purpose.

Remember, the balance transfer simply gives you an opportunity to quickly pay down existing debt. If you’re adding debts to any of your open credit cards, you’ll find it hard to take advantage of the low balance transfer rate, which only lasts a short while.

Best balance transfer cards

Now that you have the basics, here are the best balance transfer cards on the market.

FAQ

Do balance transfers hurt your credit score?

Applying for a new balance transfer credit card can temporarily cause your credit score to drop a few points, but as long as you make payments on time over the next few billing cycles, your score should recover.

How exactly does a balance transfer work?

Apply for a balance transfer credit card and move all your existing credit card debt to the new card. Keep the old cards open, but don’t use them. Then, take advantage of the new card’s low interest rates to pay down the debt.

What is the downside of a balance transfer?

There is the concern that you could keep using the old credit cards and add credit card debt instead of paying it off. Remember, the goal is to prioritize paying down debt while you have a low interest rate.

What's the best way to pay off credit card debt?

Create a realistic budget that earmarks money for paying off debt. Once you open your balance transfer card, be diligent about making those payments. At the same time, it’s vital that you don’t make new charges to your cards.

What is a balance transfer credit card?

A balance transfer card is simply a credit card that offers a low interest rate for an introductory period. This allows you to quickly pay down debt. However, the rate goes up after the intro period.

Is there a TD balance transfer credit card?

No, TD does not offer balance transfer cards. However, the TD Low Rate Visa offers 0% interest on new purchases for the first six months. Then, your interest rate remains low at 12.9%.