A balance transfer can affect your credit rating, but you can make it positive.
Opening a balance transfer card can cause positive and negative credit shifts. Your credit score — also known as your FICO score — changes based on a mix of factors, and getting a new balance transfer card will tweak several of them.
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How can a balance transfer affect my credit rating?
A balance transfer could affect your credit rating by shifting:
Average account age.
You might see a slight drop in your credit score when you apply for the card. That’s because opening a new account lowers what is known as your average account age.
Lenders look at this metric because they want to see you’ve had a relationship with your credit card for a long time. This drop usually amounts to a small five to 20 points, and you can recover from it quickly with timely payments.
Status and number of applications.
An application for a balance transfer that’s rejected, or applying for several credit cards at the same time or within a short period of time, will have a negative impact on your account.
New credit accounts constitute 10% of your credit history, so it’s important to consider this when applying for a new card.
Being unable to meet the regular minimum repayments and not repaying your balance by the end of the promotional period can increase your level of debt and have a negative impact on your credit score.
Not being able to repay your debt by the end of the promotional period and having to move the remaining amount to another balance transfer credit card can also look bad on your credit file.
Could a balance transfer credit card help my score?Your credit score may also make a positive shift, albeit a small one. Initiating a balance transfer can lift your credit score by decreasing your credit utilization rate. As the term implies, it’s how much of your available credit you’re using.
If you have a balance of $500 and a credit limit of $1,000, your credit utilization rate is 50% — $500 divided by $1,000. Lenders like to see a low credit utilization rate; they want to see that you’re not anywhere close to maxing out your credit. The lower your utilization rate is, the better it is for your credit score.
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Prevent a balance transfer from negatively impacting your credit score
There are a few easy steps you can follow to keep your credit file in good standing when conducting a balance transfer:
Don’t apply too often.
When applying for credit cards, try to spread your applications over periods of six months or a year. Applying for new cards over a longer period of time will have less of an impact on your credit file.
Review terms and conditions.
Go through the balance transfer offer terms and conditions at the very onset. Account for all applicable fees including any hidden charges, ongoing annual fees and calculate whether you can afford the card.
You’ll also need to confirm whether you meet all of the eligibility requirements — such as minimum income, credit score and residency — and that you have all of the required documents to ensure your application isn’t rejected.
Pay on time.
Making a late payment can result in the termination of the promotional balance transfer offer, so do your best to repay your balance on time.
By repaying the entire balance before the promotional period ends, you demonstrate your willingness and ability to repay outstanding debts — and you can expect lenders to view this with favor. Not repaying the entire balance before the promotional period ends will have you paying higher interest on any outstanding balance, and can also impact your ability to get a new card.
Avoid new purchases.
Avoid making purchases during the balance transfer period, as this will increase your debt.
Your repayments will automatically go towards whichever debt accrues a higher interest, which is more than likely going to be the purchase when a low or 0% intro balance transfer rate is in place. This means that you’ll be wasting funds you could be using to consolidate your debts to repay purchases.
Don’t cancel your old cards if you don’t have to.
Annual fees may motivate you to cancel them. But if your old cards have no annual fee you may want to consider keeping them open so you can raise your credit utilization rate and decrease your debt-to-limit ratio.
Maximum balance transfer rule
The most you can transfer will depend on the credit limit of the credit card you’re transferring to. That maximum credit limit will depend heavily on your creditworthiness. Because of how these interact, your credit score will likely directly affect how much of your debt you can transfer.
You may see a slightly lower limit on how much you can transfer at times. This is almost always because of a balance transfer fee, which normally adds 3% to 5% to the cost of the transfer. For a debt of $5,000 and a 5% transfer fee you would need a credit limit of $5,250 — 5,000 x 1.05 — or more.
Taking a closer look at credit utilization rate
Be careful about what transferring your debts might do to your credit utilization rate, also known as debt-to-limit ratio.
Your credit utilization rate is how much credit you have versus how much you’re using. Or, more technically, the amount of outstanding balances on your cards divided by the sum of each card’s limit.
Understanding your debt-to-limit ratio
Let’s say you have a total credit limit of $1,000 and a total balance of $500. To determine your credit utilization rate, you’d divide your total balance of $500 by your total credit limit of $1,000 — for a credit utilization rate of 50%.
When you open up a balance transfer card, your credit utilization rate goes down on that card. Here’s how:
- You have a $500 balance on your current card. This card has a $1,000 credit limit. Right now, your credit utilization rate is 50%.
- Now you transfer that $500 balance to another card with a $1,000 credit limit and no balance transfer fee, which brings your credit utilization rate down to 25% — 500 divided by 2,000.
As a rule of thumb, creditors like to see a credit utilization rate of 30% or less.
A new credit card will reduce the average age of your credit accounts, and around 15% of your credit score depends on credit age.
What goes into my credit history?
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Similar to any type of credit card, a balance transfer credit card can have a negative impact on your credit rating. Researching and comparing your balance transfer credit card options beforehand will ensure you’re applying a card that you’re both eligible for and can afford, increasing your likelihood of approval.