Credit Cards and You: Getting the Most from Your Credit Card

Getting the Most from Low Introductory Rates

Before you accept a credit card with a low introductory rate, find out which types of transactions the offer applies to. If the low introductory rate applies only to balance transfers and/or cash advances (and not to purchases), limit your new purchases until you pay off the transfers and the advances. This will save you money in the long run.

If you make purchases while carrying a balance, you may reduce the money you can save on your transfers and advances. There are two reasons for this.

• You'll lose the interest-free period on new purchases

  If you don't pay off your entire balance at the end of the first month (including all purchases, cash advances and balance transfers), you lose the interest-free period on new purchases. This means that you begin paying interest on your new purchases from the date you make them or, in some cases, from the day they are posted to your account. The interest is usually at the credit card's regular and higher rate.

• Your payments will be applied to the lower-interest-rate balance first

  Most institutions apply your payments to balance transfers and cash advances before they apply them to purchases. This is called the "order of transactions" related to payments.

  If you make a cash advance or balance transfer at a low introductory rate, and then purchase something, you end up reducing your potential savings. This is because you're paying off the lower-interest-rate debt (your transfer or advance) first, while carrying the higher-interest-rate debt (your purchase) for a longer time.

  However, the order of transactions may vary from one institution to another. Ask your credit card issuer to explain how its order of transactions applies to your payments.

Example: Getting the Most from Low Introductory Rates

In both of the following cases:

• On May 1, you transfer a balance of $5,000 from an old card to a new one to benefit from the low introductory rate.
• Your new card has a 6 per cent introductory rate on balance transfers, and an 18 per cent interest rate on purchases.
• Your payments are applied first to balance transfers, then to purchases.
• You'll have a $5,000 balance remaining, but you'll pay $9.06 less interest in Case 1.

Case 1:

• You make no other purchases during the month.
• You'll pay $25.47 in interest charges.

Case 1: No other purchases	Outstanding balance
1 $5,000 x (6% interest rate ÷ 365 [days in a year] x 31 days) = $25.47
May 1: Balance transfer	$5,000
May 31: Outstanding balance	$5,000
Interest rate on balance transfer	6%
Interest charged for May	$25.471

Case 2:

• A few days after the transfer, you make a purchase of $1,000 on your new card.
• The day after your purchase, you make a partial payment of $1,000 to bring the balance back to $5,000.
• You'll pay $34.53 in interest charges.

Case 2: Additional purchase of $1,000	Outstanding balance
	From the balance transfer	From the purchase
1 Balance transfer: [$5,000 x (6% interest rate ÷ 365 [days in a year] x 5 days) + $4,000 x (6% interest rate ÷ 365 [days in a year] x 26 days)] = $21.21 2 Purchase: [$0 x (18% interest rate ÷ 365 [days in a year] x 4 days) + $1,000 x (18% interest rate ÷ 365 [days in a year] x 27 days)] = $13.32
May 1: Balance transfer	$5,000
May 5: Purchase of $1,000		$1,000
May 6: Partial payment of $1,000 (applied to balance transfer)	$4,000
May 31: Total outstanding balance = $5,000	$4,000	$1,000
Interest rate on each balance	6%	18%
Interest charged for May	$21.211	$13.322
Total interest charged for May	$34.53