The hidden cost of balance transfers and cash advances

Credit card issuers offer to transfer the balances of your other cards to them and pay no interest on this transfer for six months. A boon? No need.

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

In fact, credit cards are one of the most expensive means of 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 the $1,000 balance, and you would also pay $754 in interest.

So if the issuer offers you several months without interest charges, why not? Just know that it’s a good idea if you respect the suggested conditions.

Pay the balance in full

In fact, if you don’t pay off the entire balance by the end of the promotional period, you could be facing a hefty bill, warns Eric Lebel, partner, turnaround and insolvency at Raymond Chabot. “Suppose you transfer a balance of $3,000 and are eligible for interest charge holiday for six months. You’ve almost paid it all off, but you still owe $50 on the due date. In this case, the credit card issuer will charge you interest on the initial balance amount, i.e. $3000, and this is even though you have already repaid $2950″, he explained. Some institutions also apply these fees in advance, meaning interest is applied on the transferred balance from the first day of the transfer. Hence the importance of reading the contract carefully before embarking on this path, as it can be slippery.

Moral of the story: Only use these types of offers if you’re sure you’ll be able to pay off the full balance before the due date. If you are successful, you will 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 on your credit report is not good for your score. So it is better to think twice.

The Kite: Risky practice

Eric Lebel also warns against another risky practice: using a credit card to pay off someone else’s balance. This form of extreme financial surfing is called Kite. Consumers multiply cards to pay others and continue to push the problem forward without addressing the debt at its source.

Remember that this practice is frowned upon by financial institutions because it does not respect the conditions of use of credit cards. Moreover, by accumulating cards, it is easy for one to lose track of what is due and due. At risk: errors and penalties.

Finally, the Kite Gives a false sense of freedom, because even though you think you’ve cleared the debt, you’ve also created another one. A vicious circle from which it is very difficult to escape.

Cash Advance: It’s Expensive!

If you’re short on cash, it can also be tempting to get a cash advance on your credit card. Sylvie de Bellefeuille, lawyer, budget and legal adviser at Option Consumertures, cautions that there is no grace period for these advances. “Interest runs right away and it runs fast!” She says that you start paying interest from the day you get the advance, usually not later than the usual 21 days from the last day of your billing period. for purchases. Think carefully before resorting to cash advances and, if possible, find a less expensive solution like a line of credit.