How credit card interest works

As an example, the CIBC Visa Select currently has a promotion that gives you 10 months you’ll accumulate 0% interest on your money transferred. You will have to pay a 1% of the amount you move. This is called a balance transfer fee. Additionally, this offer stipulates that you can transfer up to 50% of your credit limit. For more info, click here.

Regular interest

Most credit cards have an interest rate of around 20% but balance transfer cards offer a lower interest rate. For example, the CIBC Visa Select has an APR of 13.99%, with an annual fee of $29.

Let’s use an outstanding debt of $1,000 as an example. If you transferred this debt to the CIBC Visa Select, you’d pay a $10 transfer fee but then you would not accumulate interest for a full 10 months. After that time, you would be charged the lower 13.99% rate on any outstanding money. If you still owed the full $1,000, you’d owe $11.46 after 30 days (about 0.038% ($0.38) daily rate), a savings of $4.87 (as compared to a card with an interest rate of 20%).

How to use a balance transfer offer to lower credit card interest payments

Moving debt to a balance transfer credit works in two ways.

First, if there’s a low- or no-interest promotion it gives you time to pay down the principal without compounding so much interest.

Second, when the promotion ends, the debt is charged at a lower interest rate.

We’ve looked at, here, how debt works over the course of a month, but what about over a longer term? It’s not pretty.

Taking from the example above, if you owed the $1,000 on a regular credit card with a 20% interest rate and you only paid the minimum each month, it would take you 14.7 years to pay off. By that time, you’d have paid more than the principal in interest charges ($1,464.60, to be exact).

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