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Eliminating debt after COVID-19: Are balance transfers useful?

What you should know before considering balance transfers to reduce debt
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COVID-19 has caused financial challenges for Sudbury residents, leaving individuals and families struggling. Many have suffered drops in income or lost their jobs entirely, yet day-to-day expenses remain high.

With plans to reopen Ontario in phases, many will return to work and will need to consider how to rebuild on financial losses, depleted emergency funds and debt incurred as a result of this crisis. 

Can balance transfers play a role in reducing debt?

Transfer your credit card debt now and pay 0% interest; it can be difficult to say no to an offer like that.

It’s important to understand that this rate is deliberately tempting. It’s known that most Canadians carry debt. In March 2020, Equifax Canada, a credit rating agency, reported that average consumer non-mortgage debt is $23,800. This usually includes loans, lines of credit and credit cards. 

If you’re considering taking advantage of a balance transfer offer, you’ll need to satisfy several key conditions:

1. Understand this rate won’t last

Yes, that 0% interest rate is impressive, but it’s temporary. 

A balance transfer credit card is indeed offering you an attractive rate, but just for a specific period of time (usually six months to a year), making this a short-term solution. Once you reach the end of that period, the interest rate can shoot right back up to 20%.

2. Be ready to quickly pay that balance off

Any amount you transfer to a balance transfer credit card will need to be paid off in full, and quickly. Balance transfers can indeed save you hundreds of dollars in interest payments and help you become debt-free sooner, but only if you are in a position to be able to pay off the entire balance transferred before that very brief promotional period ends.

Payment made during this time directly reduce the principal debt—none goes toward interest. If you don’t pay it off in full, you can actually end up with more debt than when you started. If a balance is left over when the promotional period ends, you may be charged interest on the full original amount. Read the cardholder agreement very closely.

3. Factor in the fee

Understand that there is a fee for this convenience, and it ranges anywhere from 1.00 to 5.00% of the amount you transfer. This will be added to your credit card balance, so include it in your calculations.

4. Stay focused and don’t add to your debt load

This low-interest rate only applies to the balance you initially transferred. If you add any amount to the balance initially transferred, it will be charged the regular interest rate, about 20%.

If you observe all of these conditions, a balance transfer credit card can be worth it. The key is that you have to satisfy each one, which can be tricky and costly if a mistake is made.

If balance transfers aren’t the solution, what else can I do?

You’re not making progress and reducing the amount you owe if you’re using one form of credit to pay off another. Revolving credit card debt will not help you create a solid foundation. Instead, it’s important to work on building healthy financial habits.

When rebuilding financially, there are options available outside of balance transfers that will best suit your circumstances. For example, debt consolidation options provide a low-interest rate and simple payment schedule. 

And if you’re experiencing credit issues or have bad credit, a bad credit loan is a convenient loan alternative to high-interest credit cards or payday loans that will get you closer to securing lower rates in the future.

To rebuild your financial health and take control of future debt, invest some time in your financial education. Free, credible online resources can help you understand the causes of debt, effective strategies to reduce it, and how to avoid debt in the future. 

“53 per cent of non-prime Canadians report that they have only a basic understanding of personal financial matters including preparing a budget, improving their credit score and managing debt,” says, Andrea Fiederer, Executive Vice President and Chief Marketing Officer, easyfinancial. “However, we know that improving your financial literacy can be the key to taking control of your financial future. With an overwhelming amount of financial literacy content online, it can be challenging to find relevant and accurate financial information all in one location.” 

“With goeasy academy, Canadians can access hundreds of free articles, videos and tools all in one easy to use place from a credible and reliable source. Plus, with recommendations, downloadable eBooks and a dedicated COVID-19 resource centre, Canadians can start improving their financial literacy and taking control of their financial future today.”

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