Banks or credit card issuers provide the consumers with the balance transfer facility that allows them to transfer their debts to another account. By availing this feature, consumers can consolidate the overdue balance on their credit cards to a single loan account or transfer balances from one loan account to another to avail a lower rate of interest. Balance transfers can have positive or negative impact on your credit score depending on how you handle your debt transfer and payment. So, before opting for a balance transfer, it is important to get your free credit reportand check the impact that your existing loans and card accounts have on your report. After transferring the balance, you may see the following positive and negative impacts on your credit score.
Benefits of Balance Transfer on Credit Score
- Decrease in Credit Utilisation: If you apply for a new credit card to transfer your debt, the credit limit of the new card will add up to increase your total available credit. This increased credit limit helps to decrease your credit utilisation, which, in turn, aids in ultimately improving your credit score. However, this is only possible if you either do not utilise the credit limit of your other credit cards or keep their use to a minimum.
- Consolidation of Debt: Transferring your overdue credit amounts into one account can help in better management. By doing so, you can consolidate your debt into fewer accounts to keep better track of payments. Consequently, this would reduce the chances of further late payments and strengthen your credit score. Balance transfers are especially helpful for someone who has too many credit accounts and finds it difficult to manage the payments on each of them.
- Lower Interest Charges: Transferring your credit balance to an account with lower interest charges on overdue amounts can save you money. Lower interest will also help in lowering your overall debt via faster repayments. Thus, balance transfer could also help you in being debt-free faster and have a positive effect on your credit score in the long run.
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Drawbacks of Balance Transfer on Credit Score
- Hard Inquiry on Credit Report: Generally, the credit bureau makes a hard inquiry on your credit report whenever you apply for a new credit account for a balance transfer.This credit inquiry is conducted to verify your creditworthiness and may cause a temporary drop in your credit score by a few points.
- Increase in Credit Utilisation: If you transfer your overdue balance to an existing credit account, your total available credit remains the same as before, and there is not much difference in your credit utilisation. But, if you also use the credit limit freed on other credit card accounts at the same time, then your credit utilisation ratio (CUR) will show a considerable increase. A higher CUR would also harm your credit score by decreasing it.
- Shortened Credit History: The length of your credit history shortens whenever you close any of your credit accounts. So, if you close your old credit card accounts after the balance transfer, the credit history that you built with that account would also be lost. This will decrease the average age of your credit history and thus negatively impact your credit score.
Based on the points discussed above, you should analyse the most suitable path for you while opting for a balance transfer. A credit account with either an introductory offer of zero interest charges or at least with a lower interest rate must be preferred to avoid paying high additional charges applicable to the existing debt. Similarly, you must also look out for one-time charges that banks may apply on balance transfers. For example, in case of credit card balance transfers, you should choose a card with the least possible interest on balance transfer and a low processing fee.
It is also advisable to keep the older credit card accounts active even after you decide on opening a new account for the transfer so that your length of credit history is not affected. Apart from this, you should also make an active effort to form a strict yet practical budget to reduce your debt as quickly as possible.
The key to using the facility of balance transfer effectively is to make calculated and responsible choices. To make the best of the overdue amount transfer, you must select the account to which you would transfer your balance after careful analysis and manage your available funds and credit in a way that helps you to repay your debt efficiently and on time.