A credit card/loan balance transfer can be either positive or negative, depending on how you utilize it. While it can improve your credit score through debt consolidation and better credit utilization, it can lower your credit score due to shorter credit history and adding a hard inquiry to your credit report. However, it helps you to pay off your debts quicker at lower interest rates.
Let’s analyse the pros and cons of a credit card/loan balance transfer to help you decide if it’s the right choice for you.
What is a balance transfer?
A balance transfer is a debt management tactic that allows you to transfer your existing loans or credit card outstanding to a new account with a lower APR. Technically, you will be getting a new credit card or a loan account with the same outstanding but at a lower interest rate. Some lenders even offer 0% interest for the initial few months so that you can pay off your debt quickly at a lower cost.
A balance transfer allows you to consolidate your debt and clear them off before they overburden your finances.
What happens during a balance transfer?
If you have accumulated a high outstanding on your credit cards or loans, a balance transfer allows you to transfer the outstanding amount to a single lender at a lower rate of interest.
Banks and credit card providers provide balance transfer services, which allow you to transfer debt from one card to another. It assists in consolidating payment for all credit cards or loan EMIs so that you do not have to keep track of multiple due dates.
What is the impact of balance transfer on my credit score?
- The key impact of a balance transfer is the consolidation of debt. You can now manage a single credit instead of multiple loans or credits.
- You get a lower rate of interest which enables you to pay off the debt faster and cheaper.
- The new lender will initiate a credit check which will result in a ‘hard enquiry’ on your credit report.
- The outstanding amount on your old credit account will be paid off by the new lender and you will be free of the mounting debt and high-interest rate.
- The new loan account or credit card will open with a high outstanding amount resulting in high credit utilization ratio.
Positive Effects Of Balance Transfer On My Credit Score
- The most positive effect of a balance transfer is paying off your debt quicker. A balance transfer is a very effective tool for debt consolidation. With lower interest rates, you are able to clear your dues faster and cheaper.
- The second impact it has is on your credit utilization. When the old outstanding has been transferred to your new credit account, you need not close down your old credit cards. They would still be active and you can use them. This gives you an additional credit limit. However, one should be prudent and not overuse this limit to land in more debt. When used smartly, this additional credit line can help you lower your credit utilization ratio and thus improve your credit score.
- Also, once you start paying your consolidated debt, your credit score will see a gradual improvement. And when you clear the dues, there will be a considerable increase in your credit score.
Negative Effects Of Balance Transfer On Your Credit Score
- One of the important effects of a balance transfer is the number of hard enquiries on your credit score. When you apply for a balance transfer, the new lender will check your credit score to determine the best interest rate for you. This will result in a hard enquiry on your credit score. If you have applied with multiple lenders, you may have multiple hard inquiries on your credit report and that will result in a lower credit score.
- Another impact is on your credit utilization ratio. The new credit card or loan account will include all your existing outstanding and that will result in a very high credit utilization ratio. A high credit utilization ratio is not good for your credit score.
- Also, you are required to make the required payment and clear the dues on your new account. If you are not disciplined and miss payments on your new credit account, this will result in a further dip in your credit score. Since the new account has a larger outstanding amount, it may pinch your cash flow and monthly budgeting if not planned properly.
- Opening a new credit account will impact the ‘Length of Credit History’ criteria for your credit score. With the new account, the average age of accounts will drop having a negative impact on your credit score.
Balance Transfer is a good idea if you get a good deal at a lower interest rate and better repayment tenures. If you are not able to negotiate for a better interest rate, it is better to stay with your current credit account and pay them off quickly. You can achieve this through better debt management and proper financial planning techniques.
- Do balance transfers hurt my credit score?
Balance transfer has both positive and negative impacts on your credit score. You need to carefully evaluate the outcome before opting for a balance transfer. Talk to your credit card company or bank to understand the benefits and cons of a balance transfer, to take the right decision.
- How long will a balance transfer take?
Balance transfers usually take about 3-4 business days to be completed.
- Can I transfer my home loan?
Yes, you can opt for a balance transfer on your home loan.
- Will my old credit card be closed down once the balance transfer is completed?
No, your old credit card will be active and you can continue to use it as before.
- Do I need to have a healthy credit score to get approved for a balance transfer?
Yes, a good credit score is important for the new lender to approve your balance transfer. A good credit score assures the lender of your credibility and trustworthiness. Also, a good credit score can get you the best interest rates on your balance transfer.