November 28, 2022

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The hidden cost of balance transfers and cash advances

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 pay no interest on this transfer for six months. A boon? Unnecessary.

If your credit cards are racking up balances and you can’t pay more than the minimum payment each month, this offer is definitely worth it.

In fact, credit cards are one of the most expensive tools for accessing credit, with interest rates typically as high as 19.99%. For example, paying only the minimum payment would take you eight years and 11 months to pay off a $1,000 balance, plus you’d pay $754 in interest.

If a provider offers you the opportunity to be free of interest charges for several months, why not? Just know that it’s a good idea if you respect the suggested conditions.

Pay the balance in full

In fact, Eric Lebel, a partner at Raymond Chabot, warns that if you don’t pay the total balance by the end of the promotional period, you could be facing a huge bill. “Let’s say you have a $3,000 transfer balance and are entitled to an interest payment holiday for six months. You’ve almost paid it all, but you still owe $50 on the due date. In this case, the credit card issuer will charge interest on the full amount of the initial balance, i.e. $3000, even if you have already repaid $2950,” he explains. Some companies apply these fees retroactively, meaning interest is applied to the balance transferred from the first day of the transfer. Hence the slippery slope. The importance of reading the contract carefully before embarking on this path.

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Moral of the story: Only use these types of offers if you are sure you can pay the entire balance before the due date. If you’re successful, you’ll actually save a lot on interest charges compared to your other credit cards. Otherwise, the game candle is worthless. Also, having multiple credit cards is not good for your score on your credit report. So it is better to think twice.

The Kite: A dangerous practice

Eric Lebel also warns against another risky practice: paying off someone else’s balance using a credit card. This form is known as intensive financial browsing Kite. Consumers are multiplying cards to pay others, thereby moving issues forward without settling debt.

Be aware that this practice is highly frowned upon by financial institutions as it does not respect the terms of use of credit cards. Also, by piling up cards, it’s easy for one to miss dues and deadlines. At risk: Mistakes and penalties.

Finally, the Kite Gives a false sense of freedom because even though you feel like you’ve cleared one debt, you’ve created another. It can be very difficult to escape from a vicious circle.

Cash Advance: Expensive!

If you’re short on cash, you can also trigger a cash advance on your credit card. Sylvie De Bellefeuille, lawyer, budget and legal advisor of Option Consommateurs, warns that there is no grace period for these developments. “Interest runs immediately, and it runs fast!” That said, you’ll start paying interest from the day you receive the advance, usually not later than the usual 21 days from the last day of your billing period. Purchase. Think carefully before resorting to cash advances, and if possible, find a less expensive solution like a line of credit.