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If you’re trying to pay down credit card debt, a balance transfer to a new card can reduce how much interest you’ll pay.
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.
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.
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.
| 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.
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.
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 17.99%, which is 2% less than the typical 19.99% rate of other cards. (The interest rate for cash advances is 24.99%.)
High, compounding credit card interest rates can hold you back financially. Using a balance transfer credit 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.
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
Balance transfer offer: Receive a 0% interest rate for 12 months on balance transfers completed within 90 days. (Offer not available for residents of Quebec.)
Card details
| Interest rates | 12.99% on purchases, 24.99% on cash advances, 17.99% on balance transfers |
| Income required | None specified |
| Credit score | 660 or higher |
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One other thing to watch out for – You need to find out how the card will deal with a payment. For example, you use the card to buy $50 worth of goods. At the end of the statement period you pay $100 off on the card. You might think you are paying your $50 new purchase balance for the month along with $50 off of your transferred balance. But does the credit card deal with it that way?
Some cards would take that $100 payment and reduce your transferred balance by $100. At the same time you would have incurred a $50 new credit balance that is not a transfer, and may not be included in the promotional rate. As you spend on a card like this, your low interest outstanding balance slowly changes to a balance at the regular rate. The only way to avoid this is to not use the card for new purchases until the promotional period is over, or you have paid off your entire transferred balance.
Would what Gordon describes be explained anywhere in the ad for MBNA’s promotional material?