It is essential to consider the impact – positive or negative – that a Balance Transfer procedure will have on your overall credit score. Balance Transfer credit cards are designed to help you pay off or reduce your debts, by giving you low interest rates or interest-free promotional offer of transferring or moving your balances from a high interest rate credit card to an extremely low interest rate new credit card.
With the low interest or zero interest rate credit cards, you can conveniently consolidate your debts and pay off the principal, while saving on interest charges, for the period of the introductory offer.
About Balance Transfer Credit Cards
For Canadians aiming at consolidating their debts or paying off a huge credit card and interest charges, Balance Transfer credit cards are a fantastic solution to get off the debts and start afresh.
The Balance Transfer credit cards come with an introductory offer for a limited period. This welcome bonus is the low interest rate or zero-interest rate Balance Transfer promotional offer.
With this, you are able to move your high interest rate credit card expenses to an extremely low interest rate credit card. Thereafter, you can use the promotional period, which is usually between 3 months and 12 months, to save on interest charges and have enough funds to pay the principal debts.
About Credit Score
To get a new loan or credit from a lender, your credit score reveals everything the lender needs about your financial situation and your creditworthiness. With a credit score, the lender is able to determine how regular, timely, and responsible you will take the repayment plan.
Based on certain factors, your credit score is categorized in different percentage scores.
Factors That Influence How Credit Score Is Calculated
Payment History
Taking about 35 percent, the payment history has the largest influence on your overall credit score. Timely payment of your debts and bills will leave a positive mark while missing or late payment of your debts can negatively affect your credit ratings. With a Balance Transfer, it is vital to make timely payments towards paying off or down your outstanding debts.
Outstanding Debts
This is the amount of credit or debts owed. This factor usually takes about 30 per cent of your overall credit score. The outstanding debt is determined by your credit utilization rate, which is how much debt you currently owe, divided by your credit limit.
Generally, a good credit utilization rate is less than 30 per cent, that is, your credit card balance is less than or below 30 per cent of your total available credit limit allotted to you. Hence, the higher your credit utilization ratio, the lower your credit score, and vice versa.
Depending on your credit limit and your spending pattern, a new Balance Transfer credit card could help your overall credit score by lowering your credit utilization ratio.
Length of Credit History
This factor usually takes about 15 percent of your overall credit score. An older credit age will have a positive influence on your credit ratings. The credit history is determined by the average length of your credit accounts and the age of your oldest account.
Hence, a longer credit history will generally increase your credit score. Therefore, anew Balance Transfer credit card will decrease the average age of your credit.
New Credit
When you apply for a new credit card, a hard inquiry usually takes place on your credit report. The number of credit accounts you open and the hard inquiries made by lenders take about 10 percent of your overall credit score.
Too many accounts or credit card applications will lead to more hard inquiries, which will invariably affect your credit score negatively, and by implication, will portray you as a high financial risk to lenders.
Credit Diversity
This factor takes the last 10 per cent of your overall credit score. When you maintain different types of credit accounts, such as car loans, mortgage, and personal loan, it is an indication that you have the capacity to manage diverse types of debts concurrently.
The more credit card types you maintain with timely payments, the higher your credit score ratings.
How Balance Transfer Can Hurt Your Credit Score
Certain factors in your credit file can have a negative impact on your overall credit score. The following are some of the factors that can hurt your credit ratings.
High Credit Utilization
When you overuse your available credit limit, it could send a negative signal to creditors that you are over-dependent on your credit, and this can consequently hurt your credit ratings.
The credit utilization ratio is determined by dividing the current total revolving credit by the total amount of your credit limits. Therefore, it is advisable to keep your credit utilization ratio below 30 per cent.
Missed or Late Payments
When you apply for a Balance Transfer credit card, the aim is to use the promotional offer of low interest rate to pay off or down your debts before the regular or standard interest rate applies.
Any consecutive missed payment will attract a penalty, which is returning the interest rate to a much higher than the average interest rate on the Balance Transfer credit card. Hence, one late payment or missed monthly payment will negatively hurt your credit score.
Multiple Credit Applications
When you apply for several Balance Transfer credit cards simultaneously, or within a short period, it will have a negative influence on your credit score.
The way this works is that each time you apply, a lender will request for your credit reports, and a hard inquiry is conducted on your credit file. This inquiry stays in your credit file for about two years.
Thus, a lender will look at how many hard inquiries have been done on your credit file. Multiple application and inquiries imply you are financially desperate, and also indicates why you are constantly denied new credit by lenders. This will inevitably affect your credit score negatively.
Numerous Balance Transfers
If you are not able to take full advantage of the Balance Transfer low interest rate promotional offer, the regular interest rate will apply on the card at the end of the introductory offer.
However, if you have to move your remaining credit balance to another Balance Transfer credit card, this will definitely have a negative impact on your credit ratings.
Account Cancellation
When you transfer your credit card balance from a high interest rate card to a much lower interest rate card, you might still want to keep the old account active while also keeping a focus on the new credit card.
However, too many credit accounts or credit will increase your debt risk, an indication that you are a financial risk. This will hurt your overall credit score.
How To Prevent Balance Transfer From Hurting Your Credit Score
To keep your credit ratings intact and still do a Balance Transfer, the following are important steps to follow and adhere to:
Avoid Multiple Applications
When you need to apply for Balance Transfer, spread your credit card applications over a long period of time. This will decrease the hard inquiry on your credit file, and thus will have a minimal effect on your credit ratings.
Debt Consolidation
If your Balance Transfer credit card is applied towards consolidating your debts over multiple accounts, it will reflect in your credit score that you are taking a positive step towards payment, and can also have a positive effect on your credit score.
Timely and Regular Payment
It is important to avoid late payments or missed payment of your monthly minimum payment obligations. Late or missed Balance Transfer payment can lead to the termination of the promotional interest rate offer on the Balance Transfer credit card.
Consequently, a much higher than average interest rate will apply to the outstanding balance. Thus, when you pay your balance before the promo offer ends, it’s a positive indication of your capacity to pay off outstanding debts. This will have a positive impact on your credit score.
Avoid New Purchases
During the Balance Transfer period, avoid using your credit card to make new purchases, as this will attract a high interest rate. Balance Transfer repayments are automatically applied to the high interest credits. Invariably, you will have more debts to pay and can affect your credit ratings.
Proper Research
To avoid getting rejected with your credit card applications, ensure you make proper research to ascertain that you meet the requirements, such as income eligibility, residency, age, credit score, and more.
Conclusion
A Balance Transfer credit card procedure can have both positive and negative impacts on your overall credit score, depending on several factors outlined in this article.
Therefore it is important to apply for a Balance Transfer credit card that you can afford, that meets your needs, and that you can conveniently get its approval.
It is also important to build your credit history before making any Balance Transfer request with a card issuer or bank.
