A balance transfer credit card can reduce your debt by eliminating additional interest charges from the equation. But it can have a not-so-great effect on your credit score if you're not careful. So you have to be cautious and do your research before transferring any balances that may affect your credit. And of course, always compare credit cards to find the right balance transfer card for your needs.
What's balance transfer?
A balance transfer allows you to move the current balance from one or more credit cards to another card, usually with a low or introductory interest rate of 0%. Your debt balance won't change, but the key advantage is this: in a 0 % interest period, your credit card balance won't increase with compounding interest rate changes because there aren't any. That means you'll be able to pay it down faster. The best balance transfer credit cards typically offer an introductory interest rate that lasts from twelve to twenty-one months.
Find the right credit card for your balance transfer
There’s definitely no one-size-fits-all balance transfer card available on the market. However, there are some cards that tend to be better options. To figure out what kind of card you need, ask yourself these questions:
- What credit score do you need to qualify for the card?
Borrowell users can see how likely they are to be approved for a credit card before applying. But approval odds are guidelines only, and approval is not guaranteed. The credit card company has final say.
- Does the credit card allow you to transfer debt balance from a bank account or loan?
- Is there a limit on how much you can transfer? Is the credit card limit you are approved for high enough to cover the amount of the balance transfer?
- How long is the introductory interest rate period?
- Is there a timeframe for you to complete the transfer to benefit from the introductory offer?
- Is there a fee to transfer the balance?
What affects my credit score, anyway?
You found the right balance transfer credit card for you. Hooray! Now let's look at how your credit is affected. Your credit score dependents on a number of variables and some of these can be influenced by a balance transfer. These are the core characteristics that come with balance transfers:
Credit utilization ratio
The credit utilization ratio measures how much of your available credit has been used compared to how much is still available to you. When you carry a balance on your credit card, it increases that ratio. When you paydown your credit card balances it reduces the ratio.
A high ratio is bad, and low one is good. It is generally expressed as a percentage and most experts recommend that you keep balances on credit cards and lines of credit under 30% of you credit limit. That means on a credit card with a $1,200 limit you don't want to carry a balance over $400.
Whenever you open a new credit product, like a credit card or car loan for example, a new create account is created in your credit file. Your credit file indicates how long each of your credit accounts has been open and how well you've managed them. As your accounts age they positively impact your credit score, as long as you have never missed payments or maxed them out.
But when you open a new account, like a balance transfer credit card, two things happen: a hard credit check appears in your credit file as an inquiry, and the new account reduces the average age of your credit accounts. Both these things could lower your credit score.
Credit scoring models
Remember credit bureaus use different credit scoring models to determine your credit score. They don't all use the same formula. And each model weighs these credit factors differently. You credit score could be different from one reporting agency to the next. If you want to know what your TransUnion and Equifax VantageScore 3.0 credit values look like before you apply for a balance transfer card, then you can do so with Credit Karma or Borrowell free of charge.
Balance transfers and credit scores
If you take the steps necessary to complete a balance transfer, your credit may be affected in different ways. The lender must do a deep inquiry into your records as you apply for the new credit card. This may decrease your credit score by a few points and the inquiry will remain on your credit report for up to two years.
A balance transfer is not necessarily all bad news though. Depending on your credit history, your credit can actually improve. There is a major warning to bear in mind, though. Certain credit score models judge your overall use of credit across all your credit accounts from student loans to credit cards, while other focus more on each individual credit account on your file. If the score concentrates on the use of each card, your credit score can experience a negative impact because your debt could be more concentrated on a single card.
What to do after a balance transfer
So, you have completed a transfer of balance. That's awesome! But before you pat your own back, some work needs to be done. When you pay off your credit card debt, consider keeping all of your cards open, showing your positive payment history and helping you improve your average credit age while maintaining a low overall credit utilization ratio. But really, you want to do this all the time if you really want to build up a killer credit score.
Paying your credit card bill on time each month can also increase your credit score because the payment history on your accounts has the biggest effect on your credit score. And when you finally pay off this debt, your monthly payment obligation is gone. That could also have a positive impact on your ability to access new credit because it lowers your debt-to-income ratio; a calculation lenders use before they approve your application to determine if you can afford to take on a new monthly payment.
If you decide to complete a balance transfer, know that your credit score may decrease in the short term. This is because the average account age will be reduced and the credit usage on a single card could increased. It also involved a hard credit check when you applied for the credit card, which also impacts your credit score. Don't worry! As long as you never miss a payment and work hard to pay off your debt, your credit score will recover in no time.
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