Steps to Take After Transferring Your Balance to a New Credit Card

You’ve just taken the steps to transfer your credit card balance to one of the best balance transfer credit cards in Canada. Ideally, one with a lower interest rate or promotional “interest-free” period. Despite being pretty proud of yourself for adopting the strategy (which you should be!), you know you’re not done. Now comes the tricky part: actually paying off the carried balance. Though the idea of repayment can be overwhelming, start small by creating a plan.

Step 1: Consider keeping your old credit card account

You may have successfully transferred your debt to a new balance transfer card and found some relief. Your first thought might be to close the old account and have one less credit card to worry about. Unfortunately, this can actually set you back in the journey to improving your credit score.

Credit bureaus in Canada factor in the history of your accounts when calculating your credit score. Closing an old credit card can cut down your credit history and raise credit utilization, ultimately lowering your credit score. While credit scoring models in Canada don’t publish exact weightings, the length of your credit history is an important factor — the longer your accounts have been open, the better. Given that the length of your credit history matters, it could be advantageous to hold onto the old card. You can also talk to your bank about downgrading the card to a less premium version, allowing you to maintain the history without the annual card fees.

Step 2: Set a payoff target

If you have used a balance transfer credit card over a personal loan, you likely have a promotional period with a low (or no) interest rate. Taking advantage of this period allows you to make larger payments directly to the balance, rather than needing to cover interest charges as well. With this in mind, I recommend creating a plan for how to pay off your credit card debt inside the promotional window.

To do this, begin by taking the balance on your card and dividing it by the promotional period in months. Let’s look at an example. Imagine you have an outstanding balance of $5,000 that you have just transferred to the MBNA True Line® Mastercard® which is Canada's best 0% interest credit card. In this case, the card provides an interest rate of 0% on the transfer-in balance for 12 months. At the end of the period, though, that interest rate jumps to 17.99%. Clearly, it is in your best interest to pay off your debt within the next year.

Here, your payments should be just over $416 per month to pay it off completely. We calculate this by taking the full balance and dividing it by the number of months:

$5,000 ÷ 12 months = $416.67 per month 

Note, however, that the MBNA True Line Mastercard comes with a balance transfer fee of 3%.

Effectively then: $5,000 x 3% = $150 

Summing up to: $5,150 (total) ÷ 12 months (promotional period) = about $429.17 per month

Of course, you can make payments larger than this if your cash flow allows, but by keeping this amount as a minimum monthly payment, you can ensure that you are debt free by the end of the 12 month period.

Step 3: Automate your payments

Having a plan is great, but sticking to it is the hardest part. To ensure you follow through on your repayment plan, consider automating your payments to go directly from your bank account to your credit card on a predetermined schedule.

One way to make sure that your account is not empty on the payment date is to set recurring payments to take place on the day of your paycheck. This also ensures that you avoid late charges (which can cost you your promotional rate) and that you do not compromise by paying a lower amount. 

Bottom line:  Stick to your plan by automating it – set it and forget it!

Step 4: Monitor your credit score

Your credit score is a key piece of data which tells lenders about your credit history. The three-digit score reflects how risky you are as a borrower. Your score is a vital part of any credit application including those for mortgages, credit cards, car loans, and student loans. Potential employers and landlords may also ask for this information as well.

If you have credit card debt, then your score is probably lower than you would like to admit. But, over time, as you pay back more of the balance owed, you should see your score begin to improve. Don’t believe me? Check for yourself. You can look up your credit score through TransUnion, Equifax or even through most major banks. There is nothing more motivating than seeing your score rise as your outstanding balance falls.

Step 5: Preparing for the end of your promotional period

A balance transfer can buy you time and be a valuable tool for helping you to pay down your debt. But it doesn’t last forever. As you approach the end of your promotional period, you need to be aware of what happens next.

At the end of the period, your interest rate will revert to a much greater APR. Typically this is in the high teens. For instance, the MBNA card we used in our earlier example has a high balance transfer rate after the promotional period plays out. If you are still carrying debt at that time, you might get a shock on your next credit card statement. To avoid this, I recommend setting a reminder in your calendar for a month or two in advance, allowing you to evaluate your options should you anticipate having a balance at the end of the period.

If you suspect that you will still have an outstanding balance by then, you can consider alternative options like applying for a personal loan at a lower interest rate. You can also call your issuer to request an extension or a more favourable rate.

If you have successfully paid off your credit card debt by the end of the promotional period, take the opportunity to celebrate this win. It’s a big accomplishment!

Takeaway

A balance transfer credit card is a valuable tool for paying down credit card debt, provided you utilize it appropriately. While applying for the card is a great start, you need to do more than just give yourself some breathing room. Take advantage of the promotional period by setting a clear payment target and automating your payments. Just keep an eye out for the end of your card’s promotional period.

By creating a sound plan, you can use your balance transfer card as a turning point for your finances. Over time, you will see the impact directly reflected in your credit score. Stay consistent, stick to your plan, and eventually, at the end of the promotional term, you will have taken the first steps towards a brighter financial future.