It’s been a weird year. Housing prices spiral out of control, the stock market has seen the wild Gamestop saga, and cryptocurrency has been the roller coaster of 2021.
And in case it wasn’t obvious enough that we are living in a Bizarro world, plenty of consumers have begun to clear their credit card debt. People have more money, and people are looking for more money.
Let’s say you wanted to dip your toes into the current market. Well, you’ll need capital. So, how can you get a decent amount of capital without getting fleeced on interest or subject to Kafkaesque underwriting procedures?
The answer comes from a strange corner: the credit card balance transfer.
Disclaimer: I am not a financial analyst. That being said, do not, under any circumstances, balance-transfer $30,000 you can’t afford to lose and #YOLO it on $ObscureMicronesianLizardCoin. After all, the end goal for all of us Miles & Points enthusiasts is to be sipping cold drinks on hot beaches, debt-free and loaded up on chicken tendies.
What Is a Balance Transfer?
While credit cards date back to the 1950s, the balance transfer (or “BT” for short) is a newer invention. It was developed between the late 1980s and early 1990s to attract new credit card customers with the promise of low interest rates.
Today, the balance transfer works much the same way it did at its conception. You apply for a credit card via promotional link, or via phone when mailed a promotional offer. Your annual interest rate (APR) will be much lower than the average market rate, with rates as low as 2%, 1.9%, or even 0% APR for a set duration of time, usually anywhere between six and 12 months.
Originally, the name “balance transfer” referred to the fact that you used your new promotional card to pay off another high-interest credit card you were carrying a balance on.
These days, you can often use a balance transfer offer the same way a line of credit works. You borrow whatever quantity of money you’re comfortable taking, up to the maximum of a card’s credit limit. You are then able to direct-deposit it into your chequing account or, failing that, use convenience cheques or even ATM withdrawals to achieve the same effect.
At Prince of Travel, we always recommend paying off your credit cards on time and in full.
However, balance transfers are a bit of an exception because of the low rate of interest and the fact that they can be used for your investment benefit or as a way to repay debts at a lower rate of interest. At the same time, don’t use these to fund something frivolous like a jet ski you don’t need.
For my money, the real reason the balance transfer is so powerful is because it’s an unsecured loan – you don’t have to go through any lengthy manual underwriting processes, you just apply, and are either approved or declined for the credit card that has the balance transfer promotion.
What’s the Catch?
You didn’t think you were escaping “terms and conditions definitely apply,” did you?
As with any financial offer that’s too cool for school, there’s a plethora of legalese included in any balance transfer promotion. Make sure you read and understand the fine print.
We’ll get into the most common “gotchas” right now, and how you can deal with them.
The first catch is the balance transfer fee. Many promotional offers will have this at around 3% of the total amount you borrow, so a $5,000 balance transfer would cost you an additional $150. The best balance transfer offers will offer you low fees of between 1–2% of the principal.
There’s no way to get around these fees, but 1% of the principal for a 10- or 12-month balance transfer is lower than inflation and certainly lower than any bank’s competitive lending rates. Food for thought.
The second biggest “gotcha” is something called “proportionate allocation”.
This is the slimiest way a balance transfer can be turned against you, and it’s the reason you must never, ever use a card with a balance transfer for your actual spending activities.
This arcane and complex banking rule means that you will be charged interest on any purchases made outside the balance transfer’s principal unless you pay off the entire balance of the card. Let’s look at how this works.
Let’s say you borrow $1,000 via a balance transfer. Then you spend $100 on Raid: Shadow Legends gear hawked by your favourite YouTuber. Nuts! You realize you’ll now be charged 0% interest on the $1,000 you borrowed, but the 22.99% APR cash advance rate on your impulse buy!
You send a $100 payment to your card before your statement closes, bringing your balance back to $1,000. When your statement cuts, you’re shocked to realize you’ve been charged 22.99% interest on $90 of your statement balance and 0% on the other $910!
Because $100 is 9.09% of the card’s total balance (between your purchase and the $1,000 you balance transferred), only $9 of your $100 payment was allocated to pay off your purchase. The rest went to paying off the original balance transfer’s principal. You’ve fallen victim to the proportionate allocation trap. Interest will continue to be charged unless you pay off the entire balance.
So once again: do not actually spend any money on a card with a balance transfer.
Onto the next piece of fine print: do not borrow over your total available credit limit. Always leave a little space. My rule of thumb is to borrow 10% lower than the card’s limit and I’m happy.
For example, let’s say you have $5,000 in available credit and borrow it all. This would mean that after you add the initialization fee, you might be hitting above your credit limit, incurring an overage fee plus interest.
On top of that, your balance transfer offer might have a small amount of interest compounding each period, leading to you continuously hitting above your available credit!
Avoid this headache and just borrow under your card’s limit.
Next, let’s talk about making your payments on time. Your statement will be calculated such that any fees will be charged on your first statement, so your first minimum payment will be the balance transfer fees, plus any interest, plus $10.
The $10 you are charged represents a payment to the principal. Even when you’re getting 0% APR, you must pay a minimum of $10 every month until your promotional APR expires or you pay the balance on your card.
Always pay off these little monthly balances on time. Failure to pay on time will probably lead to late fees and, even if you can get those waived, your promotional rate will usually get yanked.
Thus, your sick $10,000 at 0% APR to play around with meme stocks will be charging you 19.99% APR as of the day you failed to pay on time, instead of generating you the magical flying lambo.
Finally: remember that there is often no grace period on balance transfer offers.
While some companies will offer you 21 days interest-free after your last statement with the promotional interest rate cuts, it’s best to pay off your balance transfer before the final statement. Some companies will charge you the traditional 22.99% APR cash advance rate the moment that last statement is printed.
What Are the Best Balance Transfer Offers?
There are a variety of balance transfers running around the market. Some of those offers are worthless because of arcane redemption rules or ridiculous interest rates. These ain’t those offers. These are the AAA wagyu beef of Canadian balance transfers.
Before we continue, I want you to say something with me:
“I will always use the promotional link. If I do not use the promotional link, I will not get the sick Balance Transfer offer. If I do not use the promotional link, I have nobody but myself to blame for missing out on super low interest rates and will refrain from posting Karen-tier complaints in the comments section.”
Also, many of these offers are sadly pas disponible au Quebec. Tabarnouche.
MBNA Lakehead University Affinity Mastercard
This card is the undisputed king of Canadian balance transfer offers. The 1% BT fee, 0% APR, 10-month period, and MBNA’s penchant for generous credit limits (and ability to combine credit from other MBNA cards) make this the best option in Canada, period.
You needn’t have attended Lakehead to get this card. Shoutout to Dr. Skogstad (from Lakehead), who taught my MBA Economics class, so I’m “sort of” an alumnus.
Also: don’t forget about the infamous “5/6 rule” when applying for MBNA cards.
A note on MBNA cards: you can request that funds be deposited to your chequing account via telephone, and whilst talking, you can also request to have your statement date placed later in the month. Customer service usually accommodates, giving you more time to pay your balance transfer.
MBNA RPNAO Affinity Mastercard
Once again, you don’t need to be in the Registered Practical Nurse’s Association of Ontario to apply for this card. This link offers 1.99% APR for 10 statements with a 1% BT fee. The same rules as the Lakehead University card apply.
RBC Cash Back Mastercard
This offer courtesy of RBC provides 1.9% APR for 10 months, but with no BT fee. Definitely a close second to the Lakehead University card.
RBC generously offers this rate on both balance transfers and cash advances, meaning you can use this card as a line of credit for 10 months.
BMO No Fee Mastercards
BMO’s no-fee Mastercards consist of the Air Miles Mastercard, CashBack Mastercard, and BMO Rewards Mastercard. Their promotional offers are all the same, a competitive 1.99% APR for nine months with a 1% BT fee.
|Credit Card||Best Offer||Value|
|800 Air Miles||$97||Apply Now|
|10,000 BMO Rewards points||$77||Apply Now|
|5% cash back||$25||Apply Now|
PC Financial Mastercards
PC Financial is offering a 0.97% APR for six months on new signups, with a 1% BT fee. The shorter duration makes these less ideal, but the ease of approval for PC Financial products make them more attractive than they otherwise would be.
Wildcard: CIBC Rotating Offers
Every so often, CIBC will offer competitive balance transfer offers. Traditionally these have consisted of 2% BT fees at 0% APR for 10 months, up to 50% of the credit limit of the card on which the offer is available. These are targeted offers available online or when calling customer service, so keep an eye out.
You’ll be on the hook for any annual fees that coincide with the balance transfer period, so definitely downgrade the card to a no-fee option prior to accepting an offer if it shows up on a premium card and you wish to take advantage of it.
|Credit Card||Best Offer||Value|
|20,000 Aeroplan points + Buddy Pass||$1,071||Apply Now|
|Up to 35,000 CIBC Aventura points||$420||Apply Now|
|Up to 4% cash back||$0||Apply Now|
Do Balance Transfers Hurt My Credit?
I’ll give it to you straight: before you get a balance transfer, consider the fact that it will probably negatively affect your credit score. This is because your score is made up of several factors, with utilization making up a whopping 30%.
If you’re maxing out a $15,000 credit limit card via a BT offer, that’ll make one credit line soar to >90% utilization, making your score go down.
If you have good credit habits, this shouldn’t hurt your overall ability to get more cards, but it may raise some eyebrows if you’re applying for a mortgage, vehicle financing, or a professional line of credit.
Balance Transfers: What Are They Good For?
Up until now, I’ve talked a lot about how to get a balance transfer and what its implications are.
Now let’s talk strategy on how to maximize them to your benefit.
Perpetual Low-Interest Debt Consolidation
The first area, that also requires the most precision, is the restructuring of low-to-medium quantities of long-term debt.
Again, I’m not a financial advisor, and this is for informational purposes only, but in my opinion a balance transfer is most useful if you’re several tens of thousands of dollars in debt from school or other professional reasons.
Assuming this is the case and you have a decent credit profile, you can apply for a balance transfer credit card to help pay that down. The barrier to approval will be much lower than a traditional loan or line of credit. Remember, though, that you need to pay off the principal in 10 months’ time.
This is where the magic of balance transfer flipping comes into effect. If you have a home equity line of credit, student line of credit, or other form of credit line, then at the end of the 10 months you can tap this to pay off your balance transfer. The balance transfer will then report to your credit profile as paid off.
Next, you apply for another balance transfer promotion, use the funds to pay off your line of credit, and carry on! It’s like magic, and will save you a significant amount of interest.
This method does have inherent risk involved, as you’re one missed payment away from losing your promotion, and your credit card application can always be denied.
Still, if you have a serviceable debt load, I find that paying 1% annually in transfer fees is superior to the typical rates of 5% and up charged by most banks on their other credit products.
This strategy of flipping balance transfers, for those of you who are absolutely mad enough to play the market right now, can also be done for the purposes of investing.
Assuming you can accept the risk, and have the funds to pay back any money you lose speculating on the market, you can use balance transfers to fund the purchases of stocks, options, cryptocurrency or other securities.
Once again: I strongly advise you against using balance transfers for high-risk investments. Do your due diligence before investing into anything, and know the inherent volatility involved.
Still, if you’re investing into legitimate products, it’s preferable for many people to use the bank’s money rather than their own, and 1 or 2% in BT fees or promotional APR is much lower than many of the margin accounts offered on apps like Questrade. The ability to forgo the agony of detailed underwriting is a plus, too.
Lastly, with the real estate market being so hot right now, I feel that the balance transfer flip is a suitable way to cobble together part of a down payment for a home.
Where I live in Edmonton, prices are low enough (for now) that working Joes like myself can pay the 10–25% down generally recommended for a first-time buyer without too much hassle. That is not the case in many other parts of the country.
If you find yourself just short of what you need to make your ownership dreams a reality, then this may be a good way for you to get that last little bit of cash together to qualify for a mortgage.
Again, do not under any circumstances take out more than you can afford to pay back, nor take this as a license to buy a five-bedroom bungalow monstrosity with a swimming pool you’ll never use.
Balance transfers can be a powerful tool to improve your financial situation, or a nasty way to bedevil yourself into debt. They’re a great way to borrow at a favourable rate, but what you do with it once it’s in your pocket is your prerogative and yours alone.
So long as you stay away from the nasty “gotchas” I outlined above, and only use balance transfers to your benefit, but within the limits of whatever financial stresses your personal situation can tolerate, they can be potent tools to improve your quality of life. Which means that one of these days, I hope to see you at the bar on the beach I mentioned for margaritas.
Until next time, never be afraid to pay less interest.