Balance transfers are a good way to pay down an enormous credit card debt. However, balance transfers can also hurt your credit score. It is necessary for all credit cardholders to know these five facts to prevent that from happening
- Balance transfers can help improve a credit score: Someone with an excellent credit score may qualify for some of the best balance transfer cards. However, those who cannot still qualify for good deals, but may not be granted initial credit lines that are sufficient enough to transfer large balances. Customers in this situation want to ask their credit card issuers, financial institutions or banks to consider lowering their rates on any balances that are not being able to get transferred
- New credit and hard enquiries: Every time a customer applies for credit, a hard enquiry is made on the credit report. A hard enquiry can cause a credit score to drop, depending on the nature of the enquiry. To minimise the effect on the credit score, customers must do the research and apply for only one card. Alternatively, a small personal loan may be a better option to consider instead of a credit card in the long run. Make sure you remember that banks don’t transfer balances between two of their own credit cards to save money from the cost of interest that they have to incur
- Balance transfers can also improve a credit score: Applying for a new card for balance transfers can reduce the load on existing credit card or loans and reduce your credit utilisation ratio. Reducing the credit utilisation ratio will show up on your credit report and improve your credit score gradually. However, if customers are not careful, then they may ruin their credit score by missing payments and using up way too much credit.
Money saved on interest with a balance transfer can help shrink overall debt faster. Lowering the amount of outstanding debt on your credit account is always a good way to deal with unforeseen problems. This way, your credit utilization ratio also gets checked and you rid yourself of any potential complications that may arise when you’re trying to transfer balances.
- Credit utilization ratio: Credit utilization is a big factor of an overall credit score calculation; new credit availability from any type of card will increase a credit allowance and lower a customer’s credit utilization ratio. It can be best to find a card with a credit limit much higher than the amount a consumer looks to transfer, but unless you’ve received a pre-approved offer card, issuers won’t generally commit to what level of credit line they will extend until you apply and they pull your credit report.
Immediately exhausting the credit limit on a new card can harm a score under certain circumstances so it is incredibly important to determine your new credit line before deicing how much of your balance to transfer
- Avoid bad credit habits: After transferring a balance, it is important that a cardholder assesses how they accumulated the high balance in the first place. Review past statements and evaluate where the money was actually spent.
Steps to take forward might also include establishing a new or stricter budget or making drastic changes to get on track for better debt management. A credit counsellor may also prove to be helpful in some cases.