Worked Examples and Checklists
Balance transfer worked example: does a promotional rate save money in Canada?
A month-by-month balance transfer example with a 3% fee, a 10-month promotional rate and the switch back to the regular rate, plus the payment allocation rules and traps to avoid.
A balance transfer saves money when the interest you avoid during the promotional period is larger than the transfer fee, and you keep paying as if the old rate still applied. In an illustrative example, moving $5,000 from a card at 20.99% to a promotional rate of 1.99% for 10 months with a 3% fee ($150), and paying $400 a month, clears the debt in 14 months for about $250 in interest and fees, against about $692 of interest and 15 months if you stayed. The saving shrinks fast if you lower your payment, make new purchases on the same card or miss a payment and lose the promotional rate.
This guide belongs to the rewards card worked examples. Rates, fees and promotional terms are illustrative; read the actual offer.
The offer, in plain terms
A typical balance transfer offer has four parts:
| Part | Illustrative example | What to check |
|---|---|---|
| Promotional rate | 1.99% | Whether it applies only to transfers made within a set window |
| Promotional period | 10 months | When it starts: the transfer date or account opening |
| Transfer fee | 3% of the amount transferred | Minimum dollar fee; whether it is added to the balance |
| Rate after the promotion | The card's regular balance transfer or cash advance rate, here assumed 20.99% | It can be higher than the purchase rate |
Balance transfers usually do not have an interest-free grace period: interest at the promotional rate accrues from the transfer date. See grace period and interest.
Scenario 1: paying $400 a month
Stay on the old card: $5,000 at 20.99%, $400 a month. Cleared in 15 months, interest about $692.
Transfer: the $150 fee is added, so the new balance is $5,150 at 1.99% for 10 months, then 20.99%.
| Month | What happens |
|---|---|
| 1 | Interest about $8.54; after the $400 payment the balance is about $4,758 |
| 1 to 10 | Interest stays under $9 a month; almost all of each payment reduces the balance |
| 10 | Balance about $1,206 when the promotion ends |
| 11 to 14 | Interest at 20.99% on the remaining balance, about $21 in month 11 and falling |
| 14 | Paid off |
Total interest about $100, plus the $150 fee = about $250. Saving compared with staying: about $442, and one month sooner.
Scenario 2: paying $200 a month
Stay: cleared in about 34 months, interest about $1,632.
Transfer: balance at the end of the promotion about $3,221. The remaining balance is then charged 20.99% and takes until about month 30 to clear. Interest about $666 plus the $150 fee = about $816. Saving about $816, but most of the debt is still there when the promotional rate ends.
The saving looks larger in dollars, but notice the risk: for 20 months you are paying the full regular rate, and a new promotion to move the balance again may not be available.
Using the calculator
The balance transfer calculator compares level payments that clear the balance over the same period at two rates. Enter an average rate when the promotion is shorter than your repayment period. For a 12-month payoff fully inside a 12-month 1.99% promotion: $5,000 needs about $465.54 a month at 20.99% versus about $421.17 at 1.99%; the $150 fee is recovered in about 4 months and the saving is about $382.
How payments are allocated
Under section 627.35 of the Bank Act, when different rates apply to balances on the same card, a bank must apply payments above the minimum either to the highest-rate balance first and then in descending order, or proportionally to each balance's share. The rule does not cover how the minimum payment itself is applied, and agreements often apply it to the lower-rate balance first; check yours.
Why it matters. If you transfer $5,000 at 1.99% and then make $1,000 of purchases at 20.99%, part of each payment may go to the cheap transferred balance first (the minimum) and the rest is split according to the bank's method. Purchases may also lose their grace period while any balance is carried. The simplest rule: do not make purchases on the card that holds the transferred balance. Use another card and pay it in full.
In Quebec, newer rules listed by the Office de la protection du consommateur say payments go first to the debt with the highest rate; see Quebec's rules.
Traps that erase the saving
- Lower payments. The offer usually lowers the minimum payment, not the amount you should pay. Keep the payment that clears the balance by the end of the promotion.
- Missed payment. Many offers end the promotional rate if you miss a payment. Set up an automatic payment.
- The old card. After the transfer, the old card has a zero balance and its full limit available again. Spending on it doubles the problem. Consider lowering the limit or closing it, thinking about the effect on your credit file; see credit score effects.
- Rewards don't apply. Balance transfers almost never earn rewards.
- Same-issuer rules. Many issuers do not allow transfers between their own cards.
- Credit check. A new card for the transfer means an application and a hard inquiry.
Is a consolidation loan better?
A personal loan has a fixed term and payment, which forces the debt to end; a balance transfer only helps during the promotion. If you need more than about a year to repay, compare a fixed-rate loan offer with an average rate for the transfer. The payoff plan calculator shows the fixed payment for any rate and term.
Frequently asked questions
Can I transfer a balance from a line of credit or a loan?
Some offers accept only credit card balances; others let you transfer from other debts or send a convenience cheque. Cheques require your express consent under the Bank Act and are often charged at the cash advance rate unless part of the promotion.
Is the transfer fee refundable if I pay quickly?
Usually not. It is charged when the transfer posts.
Does the 35% criminal rate apply to the fee?
The Criminal Code counts fees as part of interest. A 3% fee on a 10-month promotion is far below 35% APR, but fees on very short promotions raise the effective rate.
When should I talk to someone?
If you are transferring balances repeatedly without reducing the total, a non-profit credit counsellor can help you build a plan.
Sources
- Justice Laws Website — Bank Act ss. 627.32 and 627.35; Financial Consumer Protection Framework Regulations
- Financial Consumer Agency of Canada — balance transfers and promotional rates
- Office de la protection du consommateur — payment allocation under Quebec rules
- Credit Counselling Canada — non-profit credit counselling
