The hidden cost of balance transfers and cash advances

A credit card issuer offers to transfer the balances of your other cards to them and not to pay interest on this transfer for six months.

The hidden cost of balance transfers and cash advances

A credit card issuer offers to transfer the balances of your other cards to them and not to pay interest on this transfer for six months. A boon? Not necessarily.

If balances are piling up on your credit cards and you're unable to make more than the minimum payment each month, this offer is definitely worth it.

Indeed, credit cards are one of the most expensive tools for accessing credit, with interest rates typically hovering around 19.99%. For example, by making only the minimum payment, it would take you eight years and 11 months to pay off a $1,000 balance and you would also pay $754 in interest.

So if an issuer offers you to be free of interest charges for several months, why not? Know that it is a good idea only if you respect the prescribed conditions.

Pay the balance in full

Indeed, if you have not finished paying the total balance at the end of the promotional period, you are exposing yourself to a hefty bill, warns Éric Lebel, partner, turnaround and insolvency at Raymond Chabot. “Let’s say you transferred a balance of $3,000 and you have six months’ interest charge holiday. You have managed to pay almost all of it, but on the due date you still have $50 to pay. In this case, the issuer of the credit card will charge you interest on the entire initial balance, i.e. on $3,000, even if you had already repaid $2,950”, he illustrates. Some institutions even apply these fees retroactively, meaning that interest will be applied to the balance transferred from the first day of the transfer. Hence the importance of reading the contract carefully before embarking on this path, which can be slippery.

The moral of the story: Use these types of offers only if you are sure you can pay the full balance before the due date. If you are successful, you will actually save a lot of interest charges compared to your other credit card. Otherwise, the game is not worth the candle. Also, having multiple credit cards is not good for your score on your credit report. It is therefore better to think twice.

Kiting: a risky practice

Éric Lebel also warns against another risky practice: using a credit card to pay off the balance of another. This form of extreme financial surfing is called kiting. Consumers multiply the cards to pay others and continue to shovel the problems forward without settling the debt at its source.

Be aware that this practice is very frowned upon by financial institutions, because it does not respect the conditions of use of credit cards. In addition, by accumulating the cards, it is easy to lose track of what you owe and the deadlines. At stake: omissions and penalties.

Finally, kiting gives a fake feeling of freedom, because even if you feel like you have eliminated a debt, you have also created another one. A vicious circle from which it will be very difficult to escape.

Cash advance: it's expensive!

If you're short on cash, it can also be tempting to make a cash advance on your credit card. Sylvie De Bellefeuille, lawyer, budget and legal adviser at Option Consommateurs, warns that there is no grace period for these advances. "Interest runs right away and it runs faster!" she says, noting that you'll start paying interest from the day you get the advance, not after the usual 21 days from the last day of your billing period, as is usually the case for purchases. Think carefully before resorting to cash advances, and, if possible, find a less expensive solution, such as a line of credit.

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