What’s a credit card balance transfer? Can it save you money?

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Many Canadians carry debt on their credit card, perhaps resigned to paying the high interest rate they agreed to when they opened their account. What cardholders might not realize, however, is that compound interest—meaning interest charged on interest—can quickly bloat a modest debt load into a financial burden.

If you’ve been chipping away at a credit card balance but feel like you’re not really making a dent, you may want to consider a new strategy: making a credit card balance transfer. In this article, we’ll walk you through the basics of credit card interest and how to use a credit card balance transfer to keep your debt load under control.

How credit card interest is calculated

When you use a credit card, there’s an APR, or annual percentage rate, that’s applied to purchases or other services like cash advances. With many cards, this rate hovers at around 19.99%. As the name suggests, this is an annual percentage rate, but credit cards are charged monthly—so you’ll need to do some math if you want to know your daily or monthly rate. The formula is simple:

APR divided by 365 (the number of days in a year) = daily interest rate

To determine the monthly rate, multiply the daily interest rate by the number of days in the month.

How compound interest increases debt

Now that you understand how APR works, it’s time to look at compound interest. Credit cards calculate what you owe based on the principal (what you’ve charged to the card) plus any interest accumulated.

Let’s say you have a balance of $1,000 at 19.99% APR. This works out to a monthly interest rate of $16.50, so after the first month, your balance would be $1,016.50. Take a look at the following table to see how compound interest would affect your balance if you didn’t pay anything towards your bill for six months.

$1,000 debt at 19.99% APR

Number of months	Balance	Interest	Amount owing
1 month	$1,000	$16.50	$1,016.50
2 months	$1,016.50	$16.77	$1,033.27
3 months	$1,033.27	$17.05	$1,050.32
4 months	$1,050.32	$17.33	$1,067.65
5 months	$1,067.65	$17.61	$1,085.26
6 months	$1,085.26	$17.91	$1,103.17

As you can see, debt adds up fast with compound interest. One of the quickest and most effective ways to slow down the growth of credit card debt is to move it to a lower-interest card through a balance transfer.

How balance transfers work

A balance transfer is the transfer of debt from one or more (usually higher-interest) credit cards to another (usually lower-interest) card in order to slow or stop the accumulation of interest and pay down debt.

Balance transfers have three key variables to consider: the interest rate, the transfer fee and the time period.

• Interest rate: This refers to how much interest you’ll pay on the debt you transfer over.
• Transfer fee: You’ll pay a percentage of the amount of debt you’re moving, typically from 1% to 3%.
• Time period: How long the balance transfer interest rate is in effect. This is important because when the time expires, the balance will accrue interest at the card’s regular interest rate.

Many credit cards offer some sort of balance transfer, but you’ll generally save the most with a balance transfer promotion—a time-limited offer that’s designed to entice new cardholders to sign up. Consider, for example, the MBNA True Line Mastercard, a low-interest, no-annual-fee card that’s running a balance transfer promotion of 0% for 12 months, with a 3% fee (minimum $7.50) on transfers completed within 90 days of opening the account.

Let’s use the example $1,000 in debt from above to break down the numbers. If you transferred $1,000 in debt to the MBNA True Line Mastercard, it would cost you $30 (the 3% transfer fee). Then you would have a full year, interest-free, to pay down or completely pay off your balance. If you were unable to pay it all back in that time, you’d still be ahead of the game because the MBNA True Line Mastercard has a regular interest rate of 12.99%, which is 7% less than the typical 19.99% rate of other cards. (The interest rate for cash advances is 24.99%.)

To compare between cases, in six months of non-payment on $1,000, you’d owe a total of $1,066.57—a savings of $36.60 compared to a regular 19.99% card in just half a year. (It’s recommended that you pay at least the minimum balance.)

High, compounding credit card interest rates can hold you back financially. Using a balance transfer card can reduce or even remove the interest accumulation for a period of time, giving you some breathing room and an opportunity to catch up. With less interest, you’ll have less debt—which will help you get your finances under control faster.

MBNA True Line Mastercard*

The MBNA True Line Mastercard checks two key boxes for cost-conscious cardholders: it has no annual fee, and its 12.99% interest rate is much lower than that of a typical credit card.

• Annual fee: $0
• Welcome offer: Get a 0% promotional annual interest rate (“AIR”) for 12 months on balance transfers within the first 90 days of opening the account.
• Interest rate: 12.99% on purchases and balance transfers, 24.99% on cash advances
• Additional benefits: Discounts at Avis and Budget Rent A Car
• Note: This offer is not available for residents of Quebec

Read more about credit cards:

• Best credit cards in Canada for 2022
• How to lower your credit card interest rate
• Make your purchases count with credit card rewards
• Are you paying too much credit card interest?

The post What’s a credit card balance transfer? Can it save you money? appeared first on MoneySense.

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