Balance transfers are just one of the tools you can use to help pay down your credit card debt faster. A balance transfer lets you move debt from one account with higher interest rates into another account with much lower interest rates.
By paying down or paying off one account and moving it to another credit card, you can pay less interest every month and let more of your payments go towards paying down the principal. Although the practice can affect a good credit score, it doesn’t move your number much in the short term.
How a Balance Transfer Impacts Your Credit Score
Completing a balance transfer shows that you paid off one account this could be seen as a positive on your credit history. However, the debt does not go away, and it will still be on your report, albeit spread over more accounts.
Additionally, opening a new credit account to get that lower interest rate may incite a hard credit pull, which would show a small dip in your credit score over the short term.
Another way a balance transfer can impact your credit score is through your total credit utilization. Your credit utilization is defined as the amount of total outstanding credit debt you currently have divided by your total available credit. A lower credit utilization ratio is considered a positive factor for your credit score.
Generally, sources say your credit ratio shouldn’t exceed 30 or 40 percent. Let’s assume you had one credit card with a $4,000 balance out of a $5,000 credit limit. That gives you a credit utilization of 80 percent on that card.
So if you open a new credit card account with a $5,000 limit and transfer your balance to that card, you just doubled your overall credit limit. You reduced your credit utilization ratio over both credit cards to 40 percent, which should be a positive signal.
How a Balance Transfer Does Not Impact Your Credit Score
It’s important to note that one of the best ways you can improve your credit score is by paying down your total outstanding debt. As mentioned earlier, a balance transfer does not reduce your total outstanding debt. It’s kind of like playing musical chairs with your debt because you are really just moving it around from one card to another.
Even if you decided to close your previous credit card account after completing the balance transfer (which is not a good idea if you are looking to improve your credit utilization ratio), you don’t erase the credit history you accumulated with the old credit card.
The credit history associated with your account stays on your credit report for years after you close your account. So if you made late payments on the old account, those are still a part of your credit history. The impact on your credit score, however, will be minimized every time you make a prompt payment on your new account.
How a Balance Transfer Helps You Save Money
Since the new credit card has a lower interest rate, your minimum monthly payment will be lower. Paying less interest every month lets a greater portion of your payment go to servicing principal. Don’t fall into a trap of paying less just because your minimum monthly payment is lower.
If you do this, you really won’t be in a better situation than you were before the balance transfer. You want to use the interest savings of the balance transfer to jump start your ability to pay down your credit card debt.
If possible, continue making the same monthly payment on your credit cards that you were before the balance transfer. This will let you pay down your balance faster because even more of your payment will go towards paying down your principal balance. You’ll watch your balance decrease a little more every month, and this is the best thing you can do to improve your credit score and your financial health.
The real key to improving your credit score and financial situation is not to continue endless rounds of balance transfers. The best way to improve your credit score and improve your financial situation is by paying down your credit card debt. The true benefit of a balance transfer is the ability to make some real progress on paying down the outstanding balance due. So instead of using the new available credit to continue spending, do your credit score a favor and kick start your debt payoff strategy.
Author: Jeff Gitlen
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