Getting a new credit card can save you thousands in interest payments

Alright, so the title of this post may seem slightly counter-intuitive. But hear me out.

Many credit cards, by nature, have high interest rates, and those rates can go even higher if you ever start to become delinquent on your payments. That’s why ensuring you’re getting the lowest rate possible — and for as long as possible — is so important.

Let's say you have $10,000 owing on a credit card that is charging 20% interest. If you're not making a dent on that balance, you are paying about $166.67 a month in interest charges, or about $2,000 a year. That’s a lot of money! You should always think of additional interest charges as an amount being added to the total. So instead of spending $10,000 on a luxury vacation, you are now paying $12,000 for something every other person gets for $2,000 less. 

The best balance transfer card?

So, how do you avoid this? The easiest thing to do is to never use your credit card for purchases you can’t afford to pay off right away. But if you find yourself carrying a balance, think about moving it to a low balance transfer card.

These credit cards allow you to transfer a balance from your existing card and not pay interest (or pay a lower rate), for a fixed amount of time.

There’s a few cards in this space available in Canada, but the Platinum Plus Mastercard by MBNA is easily the best balance transfer card on the market. It offers 0% interest for 12 months, which squashes the next closest competitor, the BMO Air Miles credit card, offering 1.99% for 9 months. Now, these are offers, meaning they’re temporary. If you’re looking for a longer-term solution, the American Express Essential card has an interest rate of 8.99%, the lowest continual rate in Canada.

Responsible credit management is key, and in an ideal situation, every Canadian would pay off the balance on their credit card in full every month. Of course, if that happened, we’d probably drive credit card companies out of business with our responsible borrowing, and everyone would have to save up for their purchases beforehand.

Should I consider consolidating my debt?

If the total sum of your debt cannot be paid off within one year (or before the balance transfer promotion is up) you may want to consider a consolidation of your debts. In this situation, you would consolidate all of your total debts at a lower interest rate and have one monthly payment with a lower interest rate than what you were paying. In addition to this, the fees are typically lower and could save you money in the long term.

Finding a credit card with an introductory interest rate (typically a year) for balance transfers of 0% is a strategic way to reduce how much interest you are paying. If you are diligent and focused on paying down that debt, getting a 0% offer makes more sense than consolidating your debt — debt consolidation loans at the big banks often offer interest rates starting around 5%. Depending on your credit score, employment and other factors, however, that rate could be higher.

Low balance transfer cards are great, but read the fine print

If you can pay down your debt before the offer on a balance transfer credit card expires, you’ll have avoided hundreds or even thousands of dollars in interest. That being said, if you do not pay off the balance by the time the offer has expired, you will owe interest on the entire balance transfer — not just the amount outstanding. In addition to this, the interest rate will likely shoot up to an even higher amount than before. For example, the Platinum Plus Mastercard’s interest rate shoots up to 21.99% after the 12-month promotional period elapses, which is higher than the regular interest rate of 19.99%.

It’s only wise to pull off this financial maneuver if you are certain you’ll be able to pay back the entire amount. For those who can do it, it’s a tactic that will get you to being debt free faster (and it’s cheaper).

It’s also important to keep in mind a balance transfer isn’t free. Most of the balance transfer cards will charge you a small fee to complete the transfer — this is typically around 1%. The Platinum Plus Mastercard has a 1% fee, with a minimum of $7.50.