In the evolving world of personal finance, managing your credit wisely helps achieve financial well-being. Today, there are many options available for seeking financial stability and balance transfer is one of those. A balance transfer allows you to move your present debt from one credit card to another. It can help you consolidate debt and manage payments in a single place, but do balance transfers hurt your credit?
This blog will explain how balance transfer affects your credit score. So let us dive into the pool of credit scores and understand more about it.
If not balance transfer, personal loans can also help you with your debt management. Apply now and clear your debts.
How Does a Balance Transfer Work?
These days you can transfer your credit card dues into a new account. Your credit card provider or the bank provides this facility but you must be wondering, do balance transfers hurt your credit score?
Credit card issuers or banks offer a promotional rate of interest to promote this service. Known as a teaser rate, it is less than the standard financing charges. However, this is for a fixed period, and you can consolidate all your dues in a single place and manage a single monthly payment.
Your credit card issuer or the bank allows you to repay the debt interest-free or with a lower interest rate. Paying off your dues on time helps to avoid any interest payments.
Understanding Credit Scores and Their Importance
A credit score is important as it helps the lender determine your repayment capability. It is a three-digit numeric summary that portrays your financial health and credit history. A credit score is based on the lender's data, updated in the credit information report (CIR). Financial institutions use this report to decide the lending amount and interest rate.
In India, the credit bureaus consolidate data and present the credit score. Having a healthy credit score of 750 or more, you will secure higher loan amounts with an easy process and less documentation. To maintain a healthy credit score, repay your loan on time and maintain a good balance between your income and debt.
The Impact of Balance Transfer on Credit Utilisation
- The balance transfer feature consolidates your debt in a single place, and you can manage a single debt even if you hold multiple debts. However, you must keep in mind that balance transfer can affect credit scores as well.
- By using this feature, you can get loans at lower interest rates and pay them off in a short duration. This is an answer to the question of how balance transfer affects credit score.
- When you select a balance transfer feature, the due amount is transferred to a new account, leading to a 'hard inquiry' of the credit report. This aspect is important to analyse if balance transfer affects credit scores.
- The new lender clears your previous dues and relieves you from accumulating debt, thereby avoiding higher interest rates.
- Let us understand if you should opt for credit card balance transfer for fair credit. The credit utilisation ratio on the new account will be high because the new credit card will open with a higher due amount.
Factors That Can Negatively Affect Your Credit Score During a Balance Transfer
Balance transfer is a great way to effectively manage your finances. However, before using the feature, you must be aware of its consequences as balance transfers may hurt your credit score.
Here is a list of consequences that may take place because balance transfer may affect your credit score:
Increased Number of Strict Inquiries
Using a balance transfer feature significantly increases the number of hard inquiries on your credit report. The lender undertakes this inquiry to review the borrower's credit report and arrive at an appropriate decision to approve the loan. The new lender must check your repayment capability and determine the suitable interest rates.
High Credit Utilisation Ratio
The new account includes all the existing balances and leads to a high credit utilisation ratio, making you think that balance transfer affects credit score. Yes, it negatively affects your credit score.
Make Full Payments on the New Account
When you select the balance transfer option, the new account consolidates all your credits in one place, allowing you to pay all the amount in a single place. But if you fail to pay the dues on time, a balance transfer can substantially reduce your credit score as the new account has a significant amount.
Length of Credit History
Opening a new credit account impacts the length of credit history criteria for your credit score. The average age of the loan decreases with the new account and will adversely impact the credit score.
Monitoring Your Credit Score After a Balance Transfer
The balance transfer feature is smart if you use it correctly and pay off the final amount due on time. However, it is vital to check balance transfer to affect your credit score. Following are the factors you must look into:
Keep Track of the New Account
The balance transfer feature gets you a new account from your lender which may lead to a decreased credit score if you have a bad payment history. Click here to learn how to take a loan with a low credit score.
Make the Payments on Time
When you do not pay the dues within the grace period balance transfer may hurt your credit score.
Benefits of Balance Transfer
Correctly using the balance transfer feature can benefit you because clearing your dues timely will improve your credit score. As timely payment builds a positive credit history, you will remain free of the factors that make you think about balance transfers hurting credit scores.
Check the Credit Monitoring Tools
The Credit Information Bureau (India) Limited (CIBIL™), Experian, CRIF High Mark Credit Information Services, and Equifax are some of the credit rating companies in India. These companies provide credit information and can help you monitor your credit scores, besides alerting you regarding any issues. Reputed banks and NBFCs like Shriram Finance also offer credit related services and information. Regularly keeping a tab on your credit score is essential for maintaining financial awareness and ensuring your creditworthiness.
Be Patient
In some cases, it takes some time to get the complete impact of the balance transfer on the credit score. However, it is essential to be consistent and have a positive attitude towards using the balance transfer feature.
The Bottom Line
In finance, the feature of a balance transfer can be an opportunity if it is used smartly. It can be risky because if you fail to repay the amount on time, a balance transfer can affect your credit score and attract higher interest rates. Get relevant information before selecting any financial tool to make smarter decisions.
Another good way of paying off your debts is taking a personal loan. Apply for a personal loan now.
FAQs
How does a balance transfer impact my credit score?
A balance transfer can hurt your credit score because, when you open a new account, there can be changes in credit utilisation.
Does the act of applying for a balance transfer affect my credit score?
Yes, applying for the balance transfer may lead to a decrease in your credit score because it leads to a high credit inquiry, and if you fail to repay the amount on time, it impacts your credit score significantly.
Will a balance transfer appear as a new credit account on my credit card report?
Yes, the balance transfer is shown as a new credit account on the credit card report.
How does the credit limit on the new balance transfer card affect my credit score?
The credit limit on the new balance transfer card affects the credit score by influencing your credit utilisation ratio.
Will closing the old credit card after a balance transfer impact my credit score?
Yes, the closure of your existing credit card after using the balance transfer feature can affect your credit score, credit history and utilisation.
Key Highlights
- Balance transfer consolidates all your credit card dues into a single account.
- The main aim of using balance transfer is to manage your debt smartly.
- Balance transfer leads to a hard inquiry on your credit report.
- Timely repayment of dues helps in increasing the credit score.
- It potentially secures loans at lower interest rates.
