Tag Archives: transfer credit card balance

Are Those Temporary Great Credit Card Rates Worth It?

The spring wave of special temporary rate offers from credit card issuers has sprung.

But, as I keep saying, what happens in the US comes to Canada – and here’s another example of that. To transfer any balances to that cool temporary rate now comes with a fee. You’ll now pay at least a one percent transfer fee to take advantage of the special rate offer.

The one I have in front of me is from the Royal and from Scotia. The Scotia one is a 1% six month rate offer. But you have see the little asterisk and read down on page two of the fine print. You’ll pay a 1% fee for this temporary cool rate.

That 1% is enough of a fee for them to still be profitable, since banks borrow money at less than 1.5%, and I would suggest it’s not much of a deal for you.

This Scotia basic card has a 12% rate – it used to be 9.9% and they jumped it 20% when rates are still at the lowest ever – but that’s another story.

If you transfer $5,000 onto this card, the 1% six month rate will add that fee of $50. So you’re really paying a 4% effective rate: 1% interest on $5,000 anyway, and a 1% fee on top of that. If you transfer $8,000 onto the card you’re paying a total rate that’s actually 3%.

By the way, and this is something most people never realize, the cool rate is only on new transfer balances, and not on your existing balance. The only way to get the cool rate on your whole balance is to pay off the current amount in full, wait a day for it to be processed, then transfer the entire balance back, but now adding that 1% fee.

Whether the saving of a few hundred dollars is worth it is up to you. If you use it, the card issuer has won already. They’re still profitable and have accomplished their number one goal of getting your balance way up there.

What are the odds, though, that you’ll pay off this huge balance inside the six months, before the rate goes back up to the 12% or 20%? According to studies, it’s less than a quarter of all people. Then it’s a double win for the card issuer because you’re right back to the full rate the day after the temporary offer. At that point the shell game has to start again, if you can find another rate offer.

Instead of saving a few hundred dollars, there’s a guaranteed way to pay zero percent interest: Pay the current balance off and don’t spend the time and energy in transfers. You’re just kidding yourself that you’re making progress – you’re not. You’re moving your debt from one place to another. Sure, it’s a temporary interest saving, but if you spend that same time and energy just focusing on paying off your balance, you’ll be way ahead of the game for the long term.

And by the way: US transfer fees to take advantage of temporary rates are now up to 5%. What do you want to be it’ll be that amount in Canada inside the next year or two?

A Common Financial Trap We Do to Ourselves

At least three times in the past few weeks I’ve heard a common financial strategy from people with a bunch of debt: I’m going to transfer it from my credit card to my line of credit because the rate is so much less.

Yes, but no: If you believe that the interest rate matters a lot, and that your debt is about math, you’re sort of right. Sure, transferring something from 20% to 6% might be a good idea. But getting into debt, and out of it is, not about math. It’s almost all about psychology. If it were about math we wouldn’t use a 20% credit card, or buy a new vehicle that has dropped $3,000 to $5,000 in value before we get it home!

Remember that transferring your debt around is NOT the same as paying it off. All you’re doing is shuffling it from one place to another, none of which accomplishes a thing in the total amount you owe.

If you owe the money on your credit card, you’ll be way more motivated to pay it off, exactly because of the high rate. If it’s transferred to a line of credit, that motivation goes down the drain. If you do it – fine. But in two years, look back on the math and add up what you’ve paid in total. I’d bet, for most people, it’ll actually cost more since we stretch out the repayment forever.

When we transfer this $1,000 or so, it also pays down our credit card. Hurray – now we have another excuse to use our credit card again because the balance is gone. We tell ourselves the balance is paid off, but forget that it’s just owing in a different place. But six months down the road, the credit card is run up again and we STILL owe the transfer on the line of credit. That makes things worse – way worse than leaving it on the credit card and focusing on paying it off.

I’m not even dealing with the fact that we still think debt is our friend and haven’t wanted to separate our wants from our needs. That has to be true, or we wouldn’t have charged this amount, but saved the money first. Then we can buy whatever it is and actually afford it!

It’s a vicious cycle that credit card companies and our line of credit lender love to assist us with, and keep us in forever. And we’re more than willing to play the game. But it comes at a very high cost in a number of ways.

Break the cycle. Buy it when you can afford it. And if you ignore that advice, which you will, leave it where it’s owing, and get on with paying it off as quickly as possible. That will be quicker, less costly, less likely to run up the credit card again, and less stressful.