Do Balance Transfers Affect Credit Score?

When you move a balance from an outstanding credit card to another card that comes with a new offer, you are seeking to take advantage of an offer that comes with a 0% interest rate for the first few months in a bid to save on interest charges. This is a common approach that is known as balance transfer among consumers who have a significant amount of debt. But how does it work for your credit? Hey everyone! Here is what you should know about balance transfers and credit scores.

Hard Inquiries

The credit card provider will get your credit report for a hard inquiry upon your filling out the credit card application form to transfer your debt. They arise when lenders review your credit record about an application for a new credit line. Every hard credit check lowers your credit score only temporarily, a few points. Unless you have just applied for multiple new lines of credit, this is usually not a major consideration.

Credit Utilization

The two cards' credit limits define whether moving an existing debt would affect your credit use ratio. Your credit use ratio is the proportion of credit you are now using about your whole credit limit. Your credit use ratio should always be as low as it may be. Your total use will drop to 25% if you shift a $5,000 amount from a card with a credit limit of $10,000 (50% usage) to another card with a credit limit of $20,000. Using less credit has the following advantages:

Oldest Credit Card Account

Balance transfers occasionally mean that you close out your older credit card accounts. Duration of your credit accounts matters and the age of your credit is taken into account when your score is being computed. In general, it is better to have a long credit history. It is also important not to close the oldest credit accounts since it brings down the overall average age of the open credit accounts and this can be a blow to your score. When performing balance transfers, the best practice is to avoid closing old, active accounts if at all possible.

On-Time Payments

The most important way to avoid any adverse effects of a balance transfer is to maintain proper handling of the new credit card account as well as timely payments on the transferred balance every month. Outstanding balances and your ability to pay them or credit card balances and your ability to meet the due dates are usually the most significant determinants of credit score. Other aspects such as the hard credit check, change in account age, and utilization of the credit will slightly affect your score but timely and consistent payments will help counteract the effects. So long as you do not fail in making payments before or after the balance transfer your credit scores will not be much affected.

Ongoing Credit Card Use

This means not only paying the balance in time but also continuing to use the credit cards responsibly once you have transferred the balance. Credit scoring models would like to have a positive indication that you are paying off and maintaining revolving credit instruments. If you transfer the balance to a new card and then do not use that card for any purchases until the balance is fully paid off, then this can also harm your credit score. Occasionally, the card can be used for small purchases, and the new charges have to be paid in full each month.

The advantages and disadvantages of the decision

Generally, any decline in your credit score that may be occasioned by balance transfers should recover quickly within the next few months. Small drops in credit score can be endured especially when one gets to save on the interest rates that the credit card companies charge after balance transfers. So they should only apply for the new credit card when they are offered the best overall deal, must pay their bill on time, and should not close the old credit accounts if it is possible and continue to use the credit. By regularly checking your credit reports and FICO scores from the leading credit reporting agencies, you will also want to understand how balance transfers affect your creditworthiness in the long run.

The Bottom Line

Balance transfers help consumers bring down their interest costs; however, they can be detrimental if they impact credit scores. The side effects are normally mild and fleeting. All credit card bills should be paid in full and on time, and the balances that have been transferred should not be chucked haphazardly to avoid any credit repercussions from balance transfers. That is why, knowing the possible risks, transfers of balances are one of the most efficient methods of paying off debts available.

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