Holiday Debt Hangover? A Balance Transfer Card Could Be the Cure

As the champagne toasts of the new year fade, many Canadians find themselves nursing a less than celebratory type of hangover: credit card debt. Consumer card debt has soared to an all-time high, with a year spent narrowly avoiding a recession exacerbated by pressure to spend during the holidays.

The collective rise in credit card balances has made the value of an effective repayment strategy undeniable. Discover why a balance transfer credit card could be the remedy for your holiday debt hangover.

Canadians face record-breaking credit card debt

In 2022, half of Canadians who shopped during the holidays (51%) incurred credit card debt, according to a NerdWallet Canada survey. By the 2023 holiday season, 25% of that group had yet to pay off their debt.

It’s hardly surprising consumers are racking up debt year over year, between expectations to spend on holiday festivities and months spent facing high-rate and inflationary headwinds. Total credit card balances for Canadians soared to a record-breaking $113.4 billion in the third quarter of 2023, according to Equifax’s Consumer Quarterly Credit Trends Report[1].

Unfortunately, the first credit card bill of the new year can be a sobering reminder that holiday festivities come at a cost.

How a balance transfer credit card can help

If you’re feeling a little queasy looking at your credit card statement, know that you have options. Balance transfer credit cards can be just the tonic needed for post-holiday spending hangovers. They can help you consolidate, reduce or eliminate your credit card debt altogether. Here’s how they work.

Balance transfer credit cards offer a low interest rate — sometimes as low as 0% — for a set period. This low interest rate is offered on balances transferred from existing credit cards.

The promotional period on a balance transfer credit card allows cardholders to pay down their debt while accruing little to no interest. So, every dollar applied to the card’s outstanding balance becomes more impactful.

Say you have a $5,000 outstanding balance on your current credit card, and your card’s interest rate is 19.99%. If you made no payments over the course of six months, your card would accumulate $517.87 in interest.

Now, let’s say instead you transferred your $5,000 debt to a balance transfer credit card with a promotional interest rate of 1.99%. During six months of no payments, you’d generate just $49.30 in interest. That’s significantly less debt to chip away at.

4 things to consider before applying for a balance transfer credit card

Understanding the nuances of balance transfer credit cards will help you determine whether this credit product matches your financial goals.

1. Credit impact

A hard credit inquiry is performed any time you apply for new credit. Hard credit inquiries generally lower your credit score by a few points or more. This may be something to consider, especially if you’re trying to maintain or improve your credit rating.

What’s more, if you’re approved for a balance transfer card, it will affect your credit mix — another component of your credit score. Typically, a healthy mix of credit accounts has a favourable impact on your credit score, but an excess of credit accounts may be detrimental.

2. Balance transfer fees

A balance transfer credit card may help ease the pinch of debt, but expect to pay a price for the convenience. Balance transfer fees are often charged for moving your credit card balance from one card to another. The fee is typically calculated as a percentage of the transferred amount, usually 2% to 3%. So on a $1,000 credit card balance, you’d pay about $20 to $30 to transfer the balance to a different card.

Is it worthwhile to pay a balance transfer fee? It depends on how much you stand to gain from the card’s promotional interest rate.

3. Length of promotional offer

The enticingly low rate offered by a balance transfer credit card won’t last forever. Promotional offer periods vary but generally last about six to 12 months.

Before you commit to a balance transfer, consider the length of the promotional offer. You’ll want to ensure that you can pay off your transferred balance — or at least make a sizable dent — within the timeframe to maximize the benefits of the reduced interest rate.

4. Debt repayment alternatives

Balance transfer credit cards can help you organize and pay down credit card debt, but they’re far from the only debt consolidation product on the market. In some cases, a debt consolidation loan may be more appropriate.

Debt consolidation loans often offer lower interest rates and longer repayment terms than balance transfer offers. However, they may require collateral or have stricter qualification criteria.

“A balance transfer may make sense if it is a single debt that can be paid off within the specific time given,” said Stacy Yanchuk Oleksy, CEO of Credit Counselling Canada and certified educator in personal finance, in an email. “Balance transfers can work if it is a one-time solution, but they can easily turn into a cycle.”

Of course, balance transfer credit cards and debt consolidation loans aren’t the only options for folks struggling with debt.

“What can also make sense is speaking with an Accredited Financial Counsellor at a local non-profit credit counselling agency,” Yanchuk Oleksy, said in an email. There, you’ll have the opportunity to discuss a debt repayment plan tailored to your financial situation.