by Julie Jaggernath
Have you ever received some “convenience” cheques from your credit card company, with a balance transfer promotion if you use them to pay off other cards? Maybe you got an offer for a new credit card which allows you to transfer other debt over to it at a low, introductory rate. These are both balance transfer offers and all they mean is using one credit card to pay another. You might even call it “robbing Peter to pay Paul” because you’re simply moving your debt around.
Credit card companies will send you convenience cheques, or an authorization form, so that you can use a new or existing credit card to pay off all or a portion (up to your limit of available funds) of what’s owed on another credit card. How convenient, but for whom!?
Financial products don’t come with a whole lot of instructions, and the fine print can be hard to read. However, this is one time when it’s worth making the effort so that you know what you’re getting yourself into. Here’s why you should push any such offers right through your shredder.
Can a Balance Transfer Promotion Really Help with Credit Card Debt?
Balance transfers typically charge you a fee, a percentage based on how much you transferred. This is in addition to interest, which is charged right away and not after an interest-free grace period has ended. Another catch is that they’re considered cash-like transactions. Even if they have a low, introductory interest rate offer, without some very careful budget planning, you may end up with a balance owing that’s higher than the one you started with.
To use the low interest rate offer effectively to manage other credit card debt, you need to budget payments that will pay off your whole balance owing before the low interest period ends. That’s where many people run into trouble. For example, to pay off $10,000 in 9 months at a low interest rate of 1.9% (APR, annual percentage rate), you’d have to make payments of $1126.95 each month. If you had a similar balance owing, could you afford payments that high?
If taking advantage of a balance transfer promotion were that doable, everyone would be doing it. But budgeting for big credit card payments is really hard! That’s why many people who get stuck in the minimum payment trap start looking for better ways to deal with their debt, or if it gets really bad, alternatives to bankruptcy.
Cost of Balance Transfer Promotions Calculated
If you’re interested in how we arrived at payments of $1126.95/mth for the example above, then here’s how the math behind the calculations of a balance transfer works:
$10,000 x 1.9% = $190 (total interest charged in 1 year on $10,000 at 1.9%)
$190/12 = $15.84/mth (interest charged per month) on $10,000
$15.84 x 9 months = $142.56 + $10,000 = $10,142.56 / 9 = $1126.95/mth
This is just a quick way to tell how much your payments would be. With a decreasing balance, your actual payments would vary by a few dollars. This calculation also assumes you make no new purchases with your card before the $10,000 is paid off.
Can You Use the Credit Card Before the Balance Transfer Promotion Expires?
Some balance transfer promotions on new credit cards allow you to make additional purchases, other’s don’t. But the devil is in the details when it comes to the costs. Read the fine print carefully. If purchases are allowed, the interest rate is typically higher on the regular purchases, and if there is a low, introductory rate, it often expires sooner than the promotional interest rate for the balance transfer. If you can’t figure out the terms and conditions, call the credit card company’s customer service department and ask them to explain it to you.
How Credit Card Convenience Cheques Work, With or Without a Promotion
Credit card convenience cheques exist with or without a promotional offer. They let you use your credit card for cash-like transactions, or in situations where credit card purchases aren’t possible (like paying rent or daycare). Using a credit card cheque is considered a cash advance, so unlike with charging a purchase, cash-like transactions accrue interest right away, typically at a higher rate than charged purchases. There is no interest-free grace period until your statement due date, as there is with normal purchases, and you keep paying interest until the amount of the cheque (aka cash advance) has been paid in full.
What Are “Cash-Like” Transactions & Cash Advances with a Credit Card?
Convenience cheques aren’t the only form of cash-like transactions. It’s possible to withdraw money from your credit card through a bank machine or at a teller, up to your available limit. This is called a cash advance and it’s just as expensive as writing a credit card cheque. It’s also possible to be charged higher interest and/or fees on purchases deemed to be cash-like transactions by your credit card company. Convenience costs, and buying cash to do a balance transfer is no exception.
Check your cardholder agreement to see if they also consider gaming transactions (e.g. buying lotto tickets, casino chips or placing bets) as cash-like transactions. Each card is different, so there may be other cash-like transactions to be aware of as well.
The Benefits of Using a Credit Card
Just like with any tool, if you use a credit card wisely, there are benefits. Some people prefer to carry a credit card rather than cash, and others collect reward points with their card (balance transfers don’t give points). When your budget allows you to pay your credit cards off in full every month, without incurring additional debt elsewhere, they can be a free, convenient way of managing money.
How to Solve Credit Card Debt Problems without Balance Transfer Promotions
Just paying one credit card off by borrowing money from another with a balance transfer, promotion or not, will not solve your debt problems. More important is understanding how your credit card works and having a plan to keep your costs low while working towards paying off your debt. A non-profit credit counselling organization can help you make this plan. Non-profit counsellors give free advice and guidance to deal with all kinds of personal financial worries. If a balance transfer does turn out to be a good idea for your situation, then they’ll help you know how to do it right. If another option is better, then they’ll point you in the right direction. Give credit counselling a try – you’ve got nothing to lose but your debt!