Does Transferring Credit Card Balances Affect Credit Score?
How does credit card balance transfer impact credit score?
Credit cards, especially those that are used frequently, have multiple statements and due dates each month, which makes it time-wasting to try and track all of them. This is why a lot of individuals opt to transfer or consolidate balances to another card. Still, this approach can make your finances less complicated, but often one question arises about the credit score. Below, we provide more information on how balance transfers work and their impact on your credit score.
What does it mean to perform a Balance Transfer?
A balance transfer is a process in which one transfers an amount from the credit card balance to another credit card. This is very common with most credit card companies that extend limited-time zero percent APR balance transfer promotions to attract consumers to open accounts with them. This is a temporary 0% rate that lets you pay off your balance more quickly without incurring new interest charges for 12-21 months. As long as you can pay off the full transferred balance before the end of the intro period, you’ll be able to save a lot of money on interest.
Once the intro APR is over, any remaining balance will begin to accrue interest at a standard purchase rate. This is often higher than previous cards and you do not wish to have any balance remaining by this point. The next important point is to make payments during the months preceding expiration.
Balance transfers may attract other fees such as a one-time fee of 3-5% of the amount being transferred. Nevertheless, this is often below the total interest that would otherwise be accrued on balances of high-interest credit cards.
Soft Inquiry vs Hard Inquiry
One of the most important things to know is the difference between a soft credit check and a hard credit check. When you ask for your credit report, apply for a new credit, or have a potential creditor pull your credit score, it is referred to as a soft inquiry. Soft inquiries do not impact your credit score in any way.
However, when you apply for new credit, this leads to a hard inquiry being made. Hard inquiries may slightly pull down your score temporarily and they can be reported for up to 2 years.
In the case of balance transfers, for instance, the new credit card application initiates this hard credit check. However, when using the check to calculate APR it gives beforehand results thus consider a soft inquiry. Pre-qualification allows you to look at offers without damaging your credit and is not a hard inquiry.
How Are Balance Transfers Neutral in Credit Utilization?
Another important aspect of credit score is the credit utilization rate. This determines the overall balances owed against the overall credit limits for all accounts. Regarding a key guideline, it has been suggested that the ratio of utilization should not exceed 30%.
When balance transfers are done, the total amount of the balance that is owed does not change. Thus, by itself, balance transfer does not immediately affect this utilization ratio.
However, utilization of a new credit limit increases the total credit limit, provided the new credit card offers at least the amount of cash that one has transferred. Yet, with excess available credit lines but relatively constant balances, the utilization percentage reduces. This credit mix impact usually has a ‘bounce factor’ on credit scores.
Of course, it is important not to charge balances and undo this positive effect, which is often seen as a cardinal sin. Eliminate balances as much as possible and if feasible, avoid using credit cards as much as possible.
Account Mix and History
Some of the other factors that relate to your score include length of credit history and account mix. For as long as the card through which balances are transferred is still active, the history of that account still grows. It is a fact that closing old credit card accounts can worsen the score more in certain situations.
Getting a new credit card for transfers increases the options of accounts that you have. However, this means that the pursuit of signup bonuses can look reckless to lenders if you are opening and closing cards frequently. Approach incentives sparingly for those that are most beneficial.
In conclusion, balance transfers impact credit in two ways; through hard inquiries, and credit utilization. Check your balances down, and pay them off regularly, and your credit score will bounce back from slight impacts within a short time. You can also monitor your credit for free with online tools, too. Take all effects beginning with transfers into account but do not reject the intro APR if the saved interest is worth a few points lost sometimes.
What about balance transfer checks?
Instead of requesting a special balance transfer offer, a client may opt for balance transfer checks. Indeed, many credit card firms send such convenience checks to their customers as yet another way of moving the balance to the account. These are similar to conventional personal checks, but they are paid out of the available credit line.
Check offers and rates for balance transfer are also not the same as what is offered in the introductory period. There are usually no mentions of a 0% APR introductory rate. It is a fixed APR that aligns with your usual purchase rate instead of a variable interest rate. The problem with these checks is that without a temporary 0% interest rate, the consumer cannot take advantage of paying off the balance at no interest.
Furthermore, balance transfer checks do not involve the opening of a new account. Thus, they produce soft credit checks instead of hard pulls on your credit reports. There may still be an increase in utilization due to the usage of more of the available credit limit which is bad for credit score. But the impact on overall credit scores is quite negligible especially if one is not to incur much more card expense in the process.
When Are Balance Transfers a Good Idea?
The first and most obvious objective of balance transfer on credit cards is the possible reduction of interest costs. Calculate the total interest cost in the current scenario for all accounts and balances. Then compare to projected interest if aggregating balances into a new card offer with the 0% intro APR for more than a year.
Make sure to run the numbers according to your monthly payment potential as well. Establish a monthly spending limit to be able to pay for the transferred balances in full before the introductory period elapses. Paying interest after going back to the cycle defeats the essence of saving.
In addition to interest savings, eliminating the need to remember several card payments can save cognitive value as well. To some extent, it is still good, but just ensure that you do not go overboard to end up with Rackung balances again. Balance transfers may have some immediate benefits, however, nurturing good habits results in a positive credit profile and stability in the long run.
As for the credit reports and scores, use free online tools to check them from time to time as well. Ideally, once per year with more frequency when the consumer is currently seeking new credit or when transferring balances. This makes you aware of the effect of balance transfers on your score particular to your profile and credit history.
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