111 – Paying Off Your Credit Card With a Lower-Rate Card

Wayne Kay 00:04
Have you ever opened the mail and you notice that you get yourself a notification from the bank where they say, we’ll give you a lower rate card? Is it a good idea to use that to pay off your other credit cards? 

That’s our topic today for the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees. I’m Wayne Kay. 

We’re going to talk about whether or not it’s a good idea to pay off your credit card with a lower rate card. How do you go about finding these lower interest rate cards, and should you pay off the entire thing?

We’ll learn all about that and more with Mary-Ann Marriott from Allan Marshall & Associates, Licensed Insolvency Trustee in Nova Scotia.

Mary-Ann Marriott 00:49
Hello, Wayne. How are you doing?

Wayne Kay 00:51
Great. Welcome back to the show.

Mary-Ann Marriott 00:53
Thank you. Happy to be here.

Wayne Kay 00:55
We always have great discussions about real life things that are affecting Canadians all over the place, including credit card debt.

Mary-Ann Marriott 01:05
Oh, no, not the dreaded credit card debt. I can feel people shuddering now.

Wayne Kay 01:11
I was just looking up credit card debt and stats in Canada, and I think the average – do you have the average? Because I think it was like $4,500 in this quarter versus like $3,800 in the first quarter versus $2,500 maybe last year.

Mary-Ann Marriott 01:31
I’m not much for stats, but I know it’s been increasing. I look at them when they come through. But yes, it’s astronomical, really, I think.

Wayne Kay 01:41
And we’re always trying to figure out a way to pay these off.  I think our discussion is about – do people use credit cards, one credit card to pay off the other credit card, and then they’re just in an endless cycle. What does that look like?

Mary-Ann Marriott 01:56
So do people do that? They definitely do. But there’s actually a strategy here, and I’ll speak from personal experience because I’ve done this in the past. I’m going to start with a phrase I know I’ve used in these podcasts before, which is: there’s a thin line between financial strategy and financial disaster. 

If you’re just going to use a credit card to pay off another one just so you can move the debt around, that’s not necessarily a good thing. However, if you can get approved for a no interest credit card for twelve months, for example, there is some logic to transferring debt over – that’s maybe at 21% and taking advantage of that. But, and here’s the caveat, only if you have a good repayment plan in place and you’re going to stick to it.

Wayne Kay 02:44
Otherwise more danger, more debt.

Mary-Ann Marriott 02:48
Absolutely. Yes. And there is one other little strategy, and that is that credit scores are relative to your debt usage.

So if your cards are maxed out, your score drops. Transferring a percent to another card, even at the same interest rate can also be beneficial because it can help improve your credit score, which potentially can help you if you’re going to do, say, a consolidation loan. You might qualify where you didn’t before. But again, there has to be a good plan and strategy in place.

Wayne Kay 03:18
Doesn’t everybody just qualify for a consolidation loan?

Mary-Ann Marriott 03:23
No, not at all. I mean, first of all, a straight consolidation loan assumes it’s unsecured, which means it’s not against a house, and those are really difficult to get. 

And then even if you’re going to do a refinance, say, by pulling out some of the equity in your house in some way, shape or form, your credit score is definitely going to impact your ability to do that.

Wayne Kay 03:42
Really? Isn’t that terrible? This is where you need it the most – for one of these loans.

Mary-Ann Marriott 03:48
Yes, absolutely.

Wayne Kay 03:50
Oh, my gosh. Okay. You’re saying to almost divide up some of your credit card debt amongst your credit cards, or just go to the lowest one. Should you just transfer the whole thing over there?

Mary-Ann Marriott 04:02
Yes, either or, and I mean, depending on what you do determines what you do next. So if you’re going to transfer the full balance off one card to another, then that’s going to be a different strategy than if you just move some of the funds to reduce your credit utilization, which would be the purpose of that second one.

Wayne Kay 04:20
Okay, and once you get that credit card paid off, what do you do?

Mary-Ann Marriott 04:24
Yes, that’s a great question. So one would think, well, one of two things. Either I keep it because I might need it, which of course can be dangerous thinking. And then if you use it, you’ve just basically negated everything you’ve just done. There was no point if you’re going to continue to use the card. 

However, the other little piece of credit reporting is how long you’ve had credit. So my question to someone doing that would be how long did you have the credit card that you now transferred the balance off of?

Let’s say that person had that for 15 years. I wouldn’t be too quick to cancel that because it’s lending to their length of credit. However, if they only had that card for a year or two, my advice would likely be to cancel the card so that they’re not tempted to use it, so that they’re not going to potentially put themselves in more debt.

Wayne Kay 05:10
I’ve had a couple of different credit cards from some different banks, but a couple of them I never used for maybe a couple of years. And then I heard that if I canceled it, it would affect my credit rating. Is there any truth to that?

Mary-Ann Marriott 05:28
There is, because of what I said – the length of credit. Let’s say you have five credit cards, and the average length of credit on all of them is eight years. We’ll just say, so some are 15 and some are three, and I’m not really doing correct math.

So if you cancel the two that are 15 and 12, you’ve now dropped your history, your length of history of credit. You’ve dropped that down, which will drop your score. But really that’s not the only consideration. 

The bigger consideration at this point is why are you doing it? What are your future plans? Are you going to recover from that?

Definitely want to look at the bigger picture. It’s not quite as simple as if I do that, it’s going to drop my score. Well, so what you could then do the right things to get your score back up and it won’t matter.

Wayne Kay 06:17
Every once in a while in the mail, I would get some kind of cheques. They would look like cheques back in the older days.

And it would be that you can transfer your balance to this account and it’s only maybe zero or maybe 0.9% for the next six months or a year. We used it regularly to pay down debt because it seemed to me if I wasn’t paying well, who wants to pay 21%? That’s ludicrous.

Mary-Ann Marriott 06:46
Yes, absolutely. So you were using it correctly. And that’s typically what will happen if you have a card and you stop using it. They want you to use it, so they will send you out a promotional offer either in mail with the cheques, the way they used to.

I don’t think I’ve seen that too much these days. More like an email that says click here and you’re accepting. And you can absolutely do that. And you can do that by transferring other credit card debt at a higher interest, theoretically.

Let’s say you had a car loan that was almost paid off and it was at, I don’t know, 8% or 9% interest. You could potentially transfer that over. You could potentially put a portion of that on your mortgage and prepay it. 

But again, any of those things, if you do them, you want to make sure you have a payment plan in place that you’re going to pay off that lower interest rate card in the time frame before the interest goes back up. Because once it goes back up, then they apply that interest rate to the full amount owing at that time.

Wayne Kay 07:46
How do you go about getting this lower interest rate card?

Mary-Ann Marriott 07:50
One way is to do just basically what we said. Pay off some cards that you’re not using, don’t close them, hang on to them. They may make that offer to you. So then you have that to use. The other way would be simply to go looking for it. 

If you went online, for example, and you typed in, balance transfer credit card, you would come up with a few hits and you could potentially leverage those and use those to pay off your credit card.

Wayne Kay 08:18
But obviously they have to be some kind of a name brand credit card.

Mary-Ann Marriott 08:23
Yes, like a well known one.

Wayne Kay 08:25
It’s not like – Wayne’s loan, credit card loan, right?

Mary-Ann Marriott 08:31
No, no. And it usually is. I mean, you’re usually going to see those. They don’t necessarily come from the big banks, like the main five banks, but they’ll usually come from right now. 

MBNA has a balance transfer offer. I’ve seen that advertised several times. So usually like an MBNA card, maybe American Express, but it’s usually kind of your second tier lenders like, World Bank, Scotia Bank, Bank of Montreal, although they do it as well, but you don’t see it as often.

Wayne Kay 09:00
Okay, that was the old days when they’d send me those cheques in the mail. And that would have been Scotia, I think, TD would try it as well because they want your business. 

So all of a sudden they’re then saying, I get notifications, hey, you’ve got a great credit rating, let’s raise your rate. Do we want to raise our rates? Do we want to keep them the same?

I’m at a point in my life where I don’t care about my credit score. You know what I mean?

Mary-Ann Marriott 09:29
And you mean, raise your limit.

Wayne Kay 09:32
Yes, raise my limit. And I’m like, I haven’t been anywhere near my limit anyway.

Mary-Ann Marriott 09:38
Yes, that’s probably one of the most dangerous ones, because if you don’t need it, there’s really no reason to. And this all goes back to credit utilization. So if you have a $5,000 limit and you’re not using any of it, you’re rocking credit utilization. There’s no reason for you to up that. 

If, however, you’ve had some hard times and you’re at a $4,500 balance on a $5,000 limit, when you get that offer, again, it’s a thin line between financial strategy and disaster.

When you get that offer, you could take the increase. And what that will effectively do is it will reduce your credit utilization and it will improve your credit score, but only if you don’t use the extra amount. Because as soon as you use the extra amount, then you have again, negated everything you just did.

Wayne Kay 10:23
Okay, so let’s put this in complete, simple English terms. That means what?

Mary-Ann Marriott 10:29
That means that if you take the higher balance and then rack that up to the limit or close to the limit, then there was no point in doing that in the first place. You’ve made your situation worse than you had before.

Wayne Kay 10:43
So if they take the $5,000 credit card, they’re running it at $4,500, $4,600, $4,700 for their limits. That’s not good for your credit score. But there was something about 30%. Explain that.

Mary-Ann Marriott 10:57
Yes, your utilization typically, as a general rule of thumb, you want to keep it below 30%. So if you have a $10,000 credit card, you never want to carry a balance of more than $3,000. That’s generally the rule of thumb.

Wayne Kay 11:10
Okay, perfect. That’s what I was wondering. I remember you talking about that once in a previous podcast on how they look at the numbers and how that does affect your credit score.

Mary-Ann Marriott 11:20
Yes. And that’s a big one. Probably one of it’s the biggest one next to missed payments.

Wayne Kay 11:27
Yeah. Okay. And we don’t want to miss payments ever.

Mary-Ann Marriott 11:30
No, definitely not.

Wayne Kay 11:31
Like, literally by the day, or do they have like a one week leeway or anything like that?

Mary-Ann Marriott 11:36
No, it’s pretty much if you miss it on the due date, you are now behind. So whether it’s one day or one month, there’s no differentiating between that from a credit reporting perspective and they send that right there.

Wayne Kay 11:49
They tattletail on us.

Mary-Ann Marriott 11:51
Yes. You mean the credit card company’s credit reporting? They do, yes. They’re very close with the credit reporting agencies, and they make sure they know everything that’s happening.

Wayne Kay 12:02
The importance of having a credit card for young people, I hear it’s a really fast way to build your credit.

Mary-Ann Marriott 12:10
Yes, it is a fast way to build your credit. It’s also a really fast way to make some terrible mistakes and damage it before you’re out of the gate. And again, it can go either way, depending on the person with credit.

And I don’t know about you, but when I look back to my first credit card and being young and how I used it, I was not very responsible. So it’s definitely challenging. There has to be some financial literacy there for the person using it, and probably a little bit of hand holding as well, just to make sure that that young person doesn’t set themselves off on the wrong foot right out of the gate.

Wayne Kay 12:47
So there’s also the strategy of points, and unfortunately, they’re masters at coming to us with offers. You go to any store and they say, listen, we’re going to give you 20% off if you sign up on your first purchase. And you think, oh, well, that seems like a pretty darn deal.

Maybe I better start doing this, and then I want to add points. So I want to use my credit card all the time. But that makes it difficult because you don’t see it coming out of your account.

Mary-Ann Marriott 13:14
Yes.

Wayne Kay 13:15
How do you navigate that safely?

Mary-Ann Marriott 13:18
Again, all of these are within that theme of financial strategy and disaster. One of the things that I often recommend is if you’re using something so that you can get points for it, you want to track your payment history. And are you paying interest? Because ultimately, if you’re paying interest on the balance of that card that you’re getting points for, you’re paying for the points. And we don’t think of it that way.

Wayne Kay 13:47
You know what terrifies me, and some people do this all the time, lots of people do this where they pay everything on their credit card, and then at the end of the month, they pay the whole thing out. I would just about have a heart attack to see that number, whether it’s $800 or $2,500. I don’t know what it would be, but it would terrify me to see that on one bill.

Mary-Ann Marriott 14:11
Yes, totally. So this one goes really to the heart of, well, two things. I mean, you have to be a good money manager, but ultimately you have to have less expenses than your income to do that, and you have to be living that way.

Wayne Kay 14:27
Yes. Terrific. Any final words of advice you want to share with us regarding paying off that credit card with lower rate cards?

Mary-Ann Marriott 14:34
Just that there are strategies. And so if you’re struggling with credit card debt, just know that there are some options. And if you do that as part of a bigger plan, they can be really good options. 

They can save you a lot of money, and they can help you get out of debt. But you definitely want to approach it with a plan in mind, and you want to stick to that plan.

Wayne Kay 14:54
Terrific. Great advice, Mary Ann. Thank you very much for being on the show.

Mary-Ann Marriott 14:58
My pleasure, Wayne. Thanks for having me.

Wayne Kay 15:00
My guest today, Mary-Ann Marriott. You can learn more or schedule that free consultation with Allan Marshall & Associates, Licensed Insolvency Trustee by going to the website wecanhelp.ca. 

That’s it for another edition of the Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And, of course, for more information, you can always check out debtmatters.ca. Thanks for listening.