What is a balance transfer and how does it work?
According to a recent survey, half of the US population has outstanding credit card balances. Of these, 70% admit that they were unable to pay that bill this year. For many of them, making a balance transfer can be of great help. However, for many, the question still remains: does balance transfer hurt credit score?
In fact, this question is very important. So building credit is a task that can be difficult for most people. Imagine, then, after all the hard work, seeing your credit score meltdown due to a poorly thought outmaneuver. Well, first of all, it is important to introduce you to this feature that credit cards offer but is not so well known.
In fact, a balance transfer is a feature that allows you to transfer debts from one card to another. Imagine, for example, that you have a balance of $2,000 on card A and you decide to transfer the entire balance to card B.
After this operation, card A will have a balance of $0 and a debt of $2,000 will be added to the debt already on card B. So, you must be thinking: “ok, but how can this help me?” Well, when you transfer your balance to a credit card with a lower APR, you pay less interest.
In this way, part of your debt will “disappear”, as the percentage of interest charged will be lower. Also, interest can be equal to 0% if you have a card with an introductory APR of 0%. In addition, there are many other benefits of doing a balance transfer.
However, to decide if this is a good feature for you, it’s important to understand how this maneuver can affect your credit score.
How can a balance transfer hurt your credit score?
In fact, it’s not often that a balance transfer can hurt your credit score. However, it is important to be well aware of this point, as maintaining a good credit score is essential. However, there are basic behaviors that can affect your credit score.
Among them, we can mention late payment, requesting too many cards/loans in a short time, using more than 30% of your credit limit… As you use a credit card, it is important to know these “rules” by heart. In this article, we will only focus on behaviors that are directly related to credit transfer. So, follow the topics below:
Be careful when applying for a new credit card
In fact, to make a balance transfer, you will need two cards. If you do not have a second card that receives the balance, you will need to submit an application. That way, your credit score will automatically decrease.
This is a feature of banks to prevent you from being approved for too many cards at the same time. The tendency is for your score to return to normal in a short time. However, it’s important to have this information so you don’t get caught off guard.
Take a good look at how much credit you’re using
In some balance transfers, it is possible to accumulate debts greater than 30% of the limit on the same card. If that happens, your credit score will suffer. Therefore, it is important to ensure that, even after the transfer, this 30% limit is not exceeded.
Think carefully about what you will do with the old card
One of the important criteria for setting your credit score is your “credit age”. This is the measure of time you have used this service continuously. When you apply to cancel a card, especially an old card, your credit age goes down.
This causes your score to drop considerably. So, think carefully about what you are going to do with the card you used before transferring the balance.
Can a balance transfer help improve your credit score over time?
In fact, any situation that allows you to pay your bills on time will make your credit score good. So instead of hurting your credit score, a transfer can help you build it. So, see in which situations you can improve your score using these resources:
- You transferred your balance to a card with a good credit limit and your debt is less than 30% of the card;
- You’ve found a card with an introductory 0% APR for 18 months and you’re confident you can pay off your debt within that period;
- Even transferring your balance to another card, you kept the old card active and continue to use it.
However, it only makes sense to invest in a balance sheet transfer if it is part of your financial planning. Understand that every financial move must be based on a long-term plan.
What credit score do you need for balance transfer cards?
Unfortunately, not everyone can count on this feature. A balance transfer is generally only available to people with higher credit scores. So, to count on this maneuver, you will need at least 680 points. In fact, the 35% of the population that have a score lower than this will need to create other alternatives to pay their debts.
How can you tell if a balance transfer is suitable for you?
Now that you understand how a balance transfer can hurt your credit score, it’s important to know if you’re eligible. In fact, unfortunately, not everyone can count on this resource when paying debts.
There are some conditions you must meet to use this maneuver. In addition to credit score restrictions, banks generally do not allow transfers in excess of $10,000. Also, it is important that you are aware that you can include this new payment in your budget without having to incur new debt.
Finally, commit to not incurring further debt on your card until you pay off your entire balance.
That is why it is essential to consider all the aspects mentioned above so that a balance transfer doesn’t affect your financial life negatively.