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Considering a balance transfer? Learn how this option can help you eliminate credit card debt and take control of your financial future.
Ah, the New Year is a new perspective and way of looking at things in our lives.
It’s easy to create debt with a credit card, which is why the availability of a balance transfer is a life-saver for many people.
For many people, the New Year means making resolutions or promises to stay on track with their goals.
Maybe your New Year’s Resolution is keeping that promise to yourself about quitting smoking and saving money at the same time or just saving money, starting a budget, or starting a new career or second job.
Today, I want to go over what a balance transfer option is so you can decide whether it might be right for you.
A Balance Transfer Might Be The Best Option
Beginning your year with a monthly budget can be a great start to tackling your debt.
We’ve been using a budget for several years and tracking our income and spending, including asking for receipts.
It sounds a bit boring, but in part, this allowed us to become debt-free before we were 40 years old.
Ultimately, whether we had debt or not, our budget allowed us to see what was costing us more than it should and to adjust our spending habits to compensate for it.
Related: How to create a results-driven budget
I’m not going to lie to you: having a second job helped grow our net worth and inching us towards our goal of paying our mortgage off so quickly.
I didn’t do that on purpose, as it was merely a means of getting my foot in the door to a career I would ultimately love. I did just that.
For us in the CBB household, it’s out with the old to make way for the new.
We have had long enough to build up our collection of deals to start making a difference in our house.
This year will also mark the first for quite some time, and I’ve only got one career path to concentrate on.
So, it’s about using our time this year and completing some home renovation projects that have been on the books for a while.
Applying Credit Cards To Our Advantage
Most of the deals we’ve bought over the years go on credit cards where we earned points.
We have multiple credit cards, some of them for different reasons.
One card has a $500 limit.
We use that one for online purchases only.
That might sound a little defensive, but I want to limit our online footprint to a minimum.
The only reason we use different cards is because they have different levels of credit available to them.
We’ve had companies phone us and ask us if we would like more credit, but we’ve declined.
Although we use credit cards for almost all of our everyday shopping, from groceries to gasoline, we still use cash, but we use bank drafts for huge purchases.
You could call us old school, but even bank drafts have gotten the wrong end of the stick.
Recently, a couple lost a bank draft that was part of an inheritance while in transit to the recipient via UPS.
TD Canada Trust has apologized to an Ontario family and released more than $846,000, hours after CBC News reported that their original bank draft had been lost by UPS.
Thankfully, the bank sorted the situation out for this couple, but not without despair.
Canadian Household Debt Is Too High
Over the years, we’ve been careful with our money and making our money work for us instead of making someone else rich.
But what happens if your New Year resolves to get rid of that annoying debt around your neck?
It seems that many individuals and families are piling on more debt, as back in September of last year, there was more news on how bad the Canadian Household debt ratio is.
As of December 2017, Statistics Canada released a report that says the debt-to-household ratio went up and is now sitting at 171 percent.
Statistics Canada said the household debt service ratio, measured as total obligated payments of principal and interest as a proportion of household disposable income, was relatively flat at 13.9 per cent, while the interest-only debt service ratio was 6.3 per cent, down from 6.4 per cent in the previous quarter.
The debt may not be all just down to spending money at the shops; larger mortgages due to rising home prices have driven Canadians into more debt and increases in electricity and food prices.
That’s only a mention of a couple of items because the trickle effect happens when one thing goes up.
Related: All you need to know about the Ontario Minimum Wage Hike
The decline of full-time jobs hasn’t helped the people of Canada either, and now, with the minimum wage hike in 2018 up 21% from $11.60 to $14.00/hr ($16.55 2023), we may see job loss, business closures, price increases, and more Canadians worried about job security.
Not everybody has a full-time job with good benefits.
Some people work seasonal jobs, and for others to make the monthly bills, they require two or more part-time jobs.
This can be draining physically and emotionally for anyone.
Spending Too Much On Credit
It might be that credit card debt you’ve wanted to pay off over the past year and couldn’t quite manage.
It could be that you spent too much at Christmas, and now you regret your decisions.
You’re not alone.
Recently we spent a rather large sum of money on renovation materials, which exceeded $5,000.
We would start accruing interest if we couldn’t pay the balance the following month.
I’m too frugal to let someone else make money from me, so we immediately paid it off.
Unfortunately, not all of us are in the same position, and there was a time when we weren’t.
Paying off the debt accrued on credit cards isn’t easy.
High Interest rates can leave you fighting an ongoing battle that never seems to end.
In the worst-case scenario, you’re paying the absolute minimum every month and not getting anywhere.
At this point, you may consider getting a bank loan at a lower interest rate or even using a debt consolidation company.
You can also become your own debt consolidation company by obtaining a bank loan at a lower rate than the credit card company offers and then negotiating to pay off the balance as a lump sum but at a reduced amount.
Either way, the bank or consolidation company will still profit from you.
The name of the game for you isn’t so much to reduce the monthly repayments but to redirect what you are paying into actually paying the debt off and not just paying the interest.
Credit Card Balance Transfer
It might be time to change if you’re at odds with your current credit card company.
Paying off a credit card account with another credit card is possible, but if the interest rate is just as high, you’re not getting yourself any further to being debt-free.
However, you’ll still require a good credit rating.
If you don’t know what your credit rating is, you may want to get a credit check completed.
No matter what, we tend to do this yearly to check in and ensure nothing fishy is going on without our knowledge.
Balance Transfer Credit Card
What is a balance transfer credit card?
This has been a widely asked question for me over the years, and although YOU may not think it will work for you or it’s not the best option, it may be the only option for someone else.
Balance Transfer example
Taking advantage of a balance transfer could save you enough money to put towards other debts, depending on which credit card you set up the balance transfer with.
- As an example, we’ll take the $5,000 that we spent and do a little mathematical experiment on it:
- Our credit card has an interest rate of 19.99%, but to make things a little easier, we’ll call it 20%.
- This amount would take us 22 months or almost two years if we pay it off at $275 monthly.
Observation
For 22 months, at $275 per month, it makes $6006.53 – so we would pay the credit card company $1,006.53 to use their money.
That’s a pretty hefty sum of money for anyone. I’m sure you could do something else with that $1,000.
But what would the difference be if I did a balance transfer to a credit card that gave me 12 months to pay off the same amount of money interest-free?
I kept the duplicate payments of $275 per month because that’s all I could afford; with 12 months of interest-free time, I could pay more off in less time.
Twelve months at $275 per month makes $3,330 paid off, leaving me with $1,700 left to pay off.
Even if that $1,700 was still at 20% interest, I could pay the rest off in 7 months, and it would only cost me $109.56 in interest.
Some credit cards will offer different rates for the rest of the balance transfer, so be careful and always read the fine print.
This rate might not be less than the usual interest rate, but even at 22%, the final seven months would only cost you $121.37.
That means I could pay it off slightly sooner but reap a more significant reward of saving almost $900.
Credit Card Offers and Rewards
It’s always worth checking out different credit cards and taking advantage of their offer.
The MBNA Platinum Plus MasterCard was named the best balance transfer credit card by LowestRates.ca in 2017.
We take advantage of credit cards by collecting PC Optimum Points and Canadian Tire Money, which helps us save even more.
Some credit cards will charge you a one-off fee when completing a balance transfer, usually based on a percentage of the balance transfer itself.
A balance transfer fee of 1% would add $50 to our total that needs to get paid.
They charge you $50 (1%) to take on your debt for 12 months while you pay it down. It’s not the ultimate solution, but it may help you out.
Balance Transfer Research
You’ll need to sit down and work out what you want out of your balance transfer.
If you’re not sure, talk to a financial advisor who may direct you from a professional standpoint.
Do you need a minimal interest-free period and a much lower balance transfer interest rate, as your debt load is too big to take advantage of the interest-free 12-month period?
Maybe having a 12-month interest-free period is all you need, by which time you’ll have completely paid off your debt with minimal costs.
If you’re unsure what your current credit card balance is costing you, try using an online calculator.
I’m not here to recommend you go out and start spending money on credit cards; I’m just letting you know that there are alternatives to paying lots of interest on your balance.
A little research and some paperwork could help you out this year with your finances, and it may take time, but your money is worth that time.
Make sure you know what any up-front costs will be and what could happen in the event of an unplanned life event.
Education Yourself Before You Agree
Read, Read, Read
In the end, though, reading the fine print is essential.
It’s also important to never pay the minimum payment every month.
Don’t let yourself get complacent by having the interest taken away for the year and start adding more debt on top.
No debt repayment plan will fit you perfectly; you must find out what will work for you.
Your ultimate goal is to be debt-free.
Discussion Question: Have you ever used a balance transfer with your credit cards, which ultimately saved you money in the long term?
Please leave any comments below.
Thanks for reading,
Mr. CBB
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