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How Credit Card Balance Transfers Affects your Credit Score


Balance transfer and credit score

What is a Balance Transfer?

Balance transfers were created to give consumers in debt a way out. Once you’ve accumulated a large balance incurring high interest, you only need to conduct a balance transfer to take advantage of cheaper rates on another credit card. Consequently balance transfers increase competition amongst credit card companies allowing new entrants cut into the market quite easily.

Conducting a balance transfer incurs a transaction fee ranging from 2% to 5% of the total amount transferred. This fee is added to the transfer and will benefit from an intro offer if any. Some credit card companies will classify the transaction fee as a purchase transaction and you might incur purchase APR on such fee even when there’s an existing introductory offer on balance transfers.

Another issue with balance transfers is interest rates. In order to entice high debt consumers, card companies offer 0% balance transfer rates over a 6 to 12 month period. These rates are actually a good thing if you intend paying off the balance within that period. Yet not all 0% balance transfer offers are truly free.

Balance Transfers and your Credit Score

Opening a new credit card account will temporarily affect your credit score negatively. In similar fashion your credit score will take a hit if you transfer a substantial balance to a new credit card and close the previous account.

How it works

Everyone has what is called a debt percentage, which is the ratio of outstanding debt to available credit. So supposing you have a $15,000 outstanding balance on credit card A with a credit limit of $30,000, your present debt percentage will be 50% (this is not good for your credit score) assuming you don’t have other credit card accounts. Now let’s assume credit card A charges high interest and you’ve found a credit card promising to accept your outstanding balance (through a balance transfer) for a 0% balance transfer rate lasting 12 months. All this while you’ve had card A for over 3 years and have never paid late so your payment history with the company is good as it is.

You then decide the accept credit card B’s offer by transferring your $15,000 outstanding balance to that card. You’re now faced with two options. Closing the previous card A account, or managing both accounts simultaneously. When it comes to debt percentages and how these will affect your credit score, the smart decision to take is to manage both accounts simultaneously. For sakes of avoiding more debt, you should charge any expenses to credit card A but leave that account open so it’s registered in your credit report. If for example, credit card B offers a credit limit of $25,000, you should now have a total credit limit of $55,000 on both cards. This gives you a debt percentage of approximately 27% in contrast to a debt percentage of 60% if you decided to close account A affect the balance transfer.

While you shouldn’t try too hard to reduce your debt percentage, it makes sense to use this new knowledge to your advantage. Strive to pay off your outstanding balance before any intro offers expire else you will have to deal with interest rates on transferred balances which is often higher than the purchase APR.

You can find more information and FAQ about Balance Transfer at Office of the Comptroller of the Currency (OCC) page.

Balance Transfer Credit Card Offers

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