Balance Transfer has become a very popular terminology these days. With the help of a balance transfer facility, people can get rid of overdue bills on their credit cards. This is an effective way in which credit cardholders can pay off bills of their multiple credit cards and then stick to one credit card and that too at a very low-interest rate. But the question here that arises is – Will a balance transfer affect my credit score?
With this, we just do not mean that it will affect the credit score in a negative way, it might affect the credit score of an individual in a positive way as well. But before getting into the conversation of how balance transfer affects the credit score, let us first talk about, what balance transfer is and how it actually works.
Balance Transfer – Meaning
Balance Transfer is a type of credit card transaction where in debt balance of one credit card is transferred to another account. You still have to repay the amount but with the help of a balance transfer, you can combine multiple debts and payments to a single card. The amount of interest that you pay with a balance transfer credit card is comparatively lesser than what you pay with a general credit card.
How does Balance Transfer Work?
A balance transfer works when you transfer the balance of one credit card to another credit card. To be precise, the balance of your old credit card is paid off by a new credit card. This is generally done when a new credit card bears a relatively lower interest rate that the rate that you pay on your regular credit cards. Sometimes, under promotional offers, you may even be offered an APR of 0% on transferring the balance of one credit card to another credit card.
How does a balance transfer affect my credit score?
It is quite important to know that the simple process of balance transfer does not affect your credit score. The steps that you undertake to get a balance transfer credit card and the steps that you take once you have a balance transfer credit card in hand, decide how your credit score will be impacted. Now let us discuss both the positive and negative ways in which the credit score will be impacted due to balance transfer –
Ways in which balance transfer will negatively affect your credit score –
Whenever an applicant applies for a balance transfer credit card, the lender will place a hard inquiry on the applicant’s credit report. With every hard inquiry that takes place on the credit report, the credit score of the individual will decline.
Length of Credit History
The length of credit history is an important factor in determining an individual’s credit score. In case where an individual closes his previous credit cards after getting a balance transfer credit card, he will eventually lose his credit history pertaining to that credit card and will negatively impact the credit score.
Ways in which Balance Transfer will positively impact the credit score –
Increase in Credit Limit
When an applicant applies for a balance transfer credit card, the available credit limit in your name increases which will then reduce your credit utilization ratio. When you have greater credit limit available, the credit utiliaztion ratio will decrease, and hence the credit score will get better as credit utilization plays an important role in determining the credit score.
Multiple payments consolidated into one single payment
With the help of balance transfer, all your debt payments will be combined into one single payment and hence it will be easier for you to remember one single payment date instead of payment dates of multiple credit cards. This will help you in avoiding any kind of late payments towards the credit cards.
Bottom Line –
Balance transfer is a great facility with the help of which an individual can very well manage his finances. If used in an efficient manner, balance transfer can help you in getting rid of your multiple debts and can provide you various advantages such as reduced overall debt cost. But credit cardholders has to be very cautious while choosing a balance transfer credit card as you should analyze that overall debt cost should reduce should reduce and not increase after opting for a balance transfer credit card and should be used in such a manner that it helps you in improving your credit score.