What Happens to Your Credit Score When You Transfer a Balance?
If you want to pay off your credit card debt faster , you can transfer your balance to a credit card with a low interest rate (or better yet, a zero interest rate). This is not a frivolous move, but it can be useful. And surprisingly, it can actually boost your credit score.
How balance transfer works
When you transfer a balance, you take the balance on a high interest rate credit card and transfer it to a card with a lower interest rate. Some cards even offer an initial 0% interest rate on balance transfers. This way you can save on interest and pay off the principal faster.
However , you need to be very careful with this hack. This should actually be taken for granted, but make sure you read the fine print: many cards charge you a fee to transfer your balance. Others go with a 0% per annum ad period for six months or so, and then charge you sky-high interest rates (like 30%) after that period. So if you do not pay your balance in full during this time, you may pay even more interest than if you had in the beginning.
How Balance Transfer Affects Your Credit
However, surprisingly, transferring the balance can actually improve your credit score. As Abby Hayes of Credit.com notes, this is due to the so-called utilization rate .
The loan utilization rate is the amount of loan you have compared to the amount you are actually using. So, if you have one credit card with a $ 10,000 limit and your balance is $ 1,000, that means your credit utilization is about 10%. That’s not bad – most experts recommend keeping your overall credit utilization below 30% to keep your credit score intact.
Basically, however, the more unused credit you have available, the better. Assuming you keep your old card open (and don’t accumulate more debt), if you open another card to transfer your balance, that might be a good thing, because it means more credit available.
Hayes explains:
If you approved a new credit card with a balance transfer offer, you will receive a higher total credit limit. This can be a good thing, as it will lower your debt-to-loan ratio.
In the example above, if you approved a new card with a $ 1,000 limit, your total credit limit would be $ 3,000. Until you accumulate more debt, your total debt / credit will be around 33%. Since this is better than 50%, your credit rating should be fine. Plus, with a lower interest rate, you can probably pay off debt faster.
Better yet, when you pay off your debt, your account will improve even more because you are using even less available credit. However, it’s also worth noting that opening a new line of credit can also lower your score. This hit is usually short-lived, but it is generally not advisable to open a new credit card when you apply for a mortgage or other loan.
If you think about the balance transfer, you can explore the map conditions on sites such as Credit.com , NerdWallet or Bankrate . They may be worth it, just make sure you follow the rules and perform translation responsibly.