Do balance transfers hurt your credit score? Balance transfers can indirectly hurt or help a credit score, depending on various factors. Though, a balance transfer can be a wise decision in the long term as the cornerstone of a debt-reduction plan. Right now Hanfincal will show you the details of how a balance transfer could affect your credit score.
1. Do balance transfers hurt your credit score?
Balance transfers won’t hurt your credit score directly, but they may cause some changes that affect your credit in both good and bad ways in the short term.
Let’s look at the impact of a balance transfer on your credit score in further depth.
1. 1. How do balance transfers hurt your credit score?
Balance transfers will hurt your credit score by adding new hard inquiries, increasing debt, and opening a new credit card to shorten your credit history. It may result in a lower credit score rather than a higher one in some cases. Maintain your focus on the following points:
1.1.1 Get a hard inquiry
A hard inquiry on your credit report will occur if you apply for a new balance transfer credit card. This will lower your credit score by a few points at first, and it will remain on your credit report for up to two years. Your application will be denied by a lender due to multiple hard inquiries on your credit report.
However, they don’t affect your credit score as much as the history of payments or total debt does.
1.1.2 Increase total debt
A balance transfer will only benefit you if you handle it responsibly. If you open a new credit card account, transfer your debt to it, and continue to incur new credit card debt each month, you may be in severe financial trouble. This type of behavior may also hurt your credit score.
If you continue to incur credit card debt, your credit utilization level may rise again. Higher credit utilization ratios are never good for your credit score.
1.1.3. Lower your credit history length
The length of credit history is also affected by opening a new card. A new card can lower the average age of your credit, which can lower your credit score.
However, remember that the length of your credit history has less of an impact on your credit score than other factors. As long as you keep your credit utilization low and your payments on time, these more essential factors may offset any potential credit score drop caused by a decline in your credit age.
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1.2. How can a balance transfer help your credit score?
Actually, a balance transfer will not raise your credit score on its own. However, it may cause some changes to the overall composition of your credit report that will benefit you. Here are some highlights you should not overlook:
1.2.1. Reduced credit utilization
This is the proportion of your total available credit that you are using, accounting for 30% of your credit score.
The key to enhancing your credit score is to use the transfer to reduce your debt — both dollars and a percentage of your available credit. Debt elimination sends the kinds of signals that result in higher credit scores.
The amounts you owe make up 30% of your FICO credit score. Every buck you don’t have to pay in interest is a valuable buck you can put toward debt repayment. This allows you to pay your debt faster, good for your credit.
A thumb rule is to keep your credit utilization ratio under 30%, both per card and across all cards.
If you have two credit cards:
Card A: $3,000 limit with a $1,000 balance;
Card B: $5,000 limit with a $3,000 balance
According to this, it is easy to see that now you have: a 33% utilization ratio on Card A; a 60% utilization ratio on card B; and a 50% overall utilization ratio. (utilization ratio equals balances divide by credit limit).
Now you get a balance transfer card (Card C) with a $7,000 limit and move all the other debt to it. You now have a utilization ratio of 0% on Card A, 0% on Card B, 57% on Card C, and 26% overall. On the whole, this will look better on the consumer’s credit report.
1.2.2. Fewer accounts with outstanding balances
Another factor influencing your credit score is the number of accounts with outstanding balances on your credit report. Having fewer accounts with balances is preferable to having too many.
In other words, transferring balances from multiple credit cards or loans and combining them into a single account reduces the number of accounts on your credit report that have balances. When this occurs, there is a chance that your credit score will improve as a result.
However, a balance transfer probably won’t affect your credit score. That is when you transfer a balance to existing credit cards. Say you have many credit cards open and one of them has a significant debt with a high interest rate. If you transfer this debt to your other cards with a lower interest rate, it will not affect your credit score.
2. What are the requirements for a balance transfer?
To be eligible for a balance transfer, your credit score should be good or excellent, which is 670 or higher on the 850-point FICO credit scoring scale. Besides, your balance transfer request will be held by the issuer until the amount to be transferred is confirmed in relation to your credit limit. If your credit limit is less than the amount you want to transfer, the issuer will almost certainly deny your request.
3. Is a balance transfer a good idea?
3.1. A balance transfer may be a good way to save money.
It is ideal for consumers who have a lot of high-interest debt to pay off. In other words, if you need many months to pay off high-interest debts and have good enough credit to qualify for a 0% introductory APR card, a balance transfer is the best option. This card can help you save a lot of money in interest, giving you an advantage when paying off your balances.
For example, suppose you have a $10,000 balance on a credit card with a 15% interest rate, and your goal is to pay it off in the next 12 months. If you leave the debt on that card while paying it off, you can expect to pay about $830 in interest. However, if you transfer it to a card with a 0% APR for 12 months, you will pay no interest.
Don’t forget that most credit cards charge a 3% to 5% balance transfer fee. Assuming you pay off your balance during your 0% APR period, a 3% fee is nothing compared to the amount you could be paying in interest otherwise.
3.2. It won’t change your level of debt.
If you owe $5,000 on one card and transfer it to another, you will still owe $5,000. You’re also responsible for any unpaid interest that accrued on the account before the debt was transferred. You have to use the new card to pay off some of that debt.
However, if you want to qualify for a mortgage in short term, you should do so first before transferring your balance. Because a balance transfer card will affect your mortgage application by a hard inquiry when applying for a new credit card. A minor disparity in credit scores might result in a mortgage application being declined.
4. How to rebuild credit after balance transfers
Consider keeping all of your credit cards open as you pay down your debt, including those from which you transferred balances. Keeping your accounts open can help demonstrate your good payment history, increase the average age of your accounts, and keep your overall credit utilization low.
Make and stick to a debt repayment plan that considers the length of your 0% interest period. Paying off your entire debt during your introductory APR period maximizes the benefits of your balance transfer and helps your credit score rise afterward.
Stop charging on your other credit cards while your 0% interest period is active.
To avoid incurring new credit card debt, pay them off on time and in full when you resume using your credit cards. This can also help your credit, as payment history has a large impact on your scores.
Do balance transfers hurt your credit score? Hanfincal hopes that all of this reliable information will be useful to you. Everything has positive and negative effects, and a balance transfer is no exception. A thorough understanding of both sides mentioned above will provide you with good insight and assist you in making a suitable decision for your financial life.
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