It is that time of year again. You know, the season when credit card companies start sending out those balance transfer offers in bulk, hoping to entice you to sign up.
But should you sign up for them? Is transferring a credit card balance over to a new card a good thing? Well, the truth is it can be if you do it the correct way.
Credit card balance transfers can affect your credit score either positively or negatively, depending on the circumstances and terms of the offer.
If you have a credit card that is maxed out, and you are paying a high rate of interest, signing up for a balance transfer card may help you out. But if you are constantly rolling your balance to a new card instead of paying it off, you will quickly wind up in trouble.
Here is a list of five ways a balance transfer can affect your credit:
The good ways:
1. It increases your debt-to-available-credit ratio.
Let’s say you have a credit card with a $5,000 limit and a $4,000 balance on it. Your credit utilization or debt-to-credit ratio is 80 percent.
Due to the fact this component accounts for 30 percent of your overall credit score, it is probably having a negative effect.
If you open a balance transfer credit card account that also has a $5,000 credit limit, your available credit is now $10,000 and your ratio is a much more attractive 40 percent. This can have an immediate positive impact on your credit score.
2. It allows you to pay down principal faster.
If you open a balance transfer card account, it will usually come with a low or even zero interest rate. If you had previously been paying a high interest rate, only a portion of your payment goes toward the principal.
This means it will take longer to pay off. With a lower or zero percent interest rate, the principal gets paid down sooner and your credit score improves along with your reduced debt.
“When you get a new card,
the average will be lowered.”
The bad ways:
1. It lowers the overall credit age of your accounts.
The age of our credit is one of the factors in determining our score. What this means is the longer you have held your credit cards, the more positively it affects your score.
This component accounts for 15 percent of your total score.
If you only plan to do a single balance transfer, this negative effect likely would be offset by the benefits listed above. However, multiple balance transfers will dramatically lower the average credit age and could definitely have a negative impact.
2. It creates a credit inquiry.
We know each time we apply for a credit card or a loan, it generates a hard inquiry of our credit report.
This component accounts for 10 percent of our credit score, which can negatively impact our overall credit score.
Similar to the credit age component, one inquiry is not likely to do too much damage. However, if you apply for multiple balance transfer accounts, it can actually bring down your credit score.
3. It can give a false sense of safety.
If you have been worried about your rising debt levels, a balance transfer can seem like a lifesaver.
All of a sudden your debt problems do not feel as desperate. You may even start paying less each month, as your minimum payment will likely be lower.
This is a trap. Balance transfers are meant to give you an opportunity to pay down your debt at a lower rate and pay it off sooner, hopefully.
If you do not use it wisely, you will soon find yourself in the same position, except with even more debt to worry about.
Using a balance transfer card can be good, if you use it the right way.
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