A balance transfer moves debt from one creditor to another. This usually involves moving debt from one credit card to a new credit card that offers a low-interest or no-interest promotional period on the balances you transfer. These balance transfers can be useful tools for managing debt – the promotional period lets you focus on paying off the balance without having to pay interest.
A balance transfer will be reflected in your credit report, and it can affect your credit in several ways. The way you manage your balance transfer card will also have a significant impact on your credit.
When to Consider a Balance Transfer
A balance transfer is not the right tool for every situation. It works best under certain conditions:
- You Have High-Interest Credit Card Debt That You’re Committed to Paying Off
- You Have Enough Income to Pay Those Debts Off in the Fixed Time Give for the Promotional Period
- You Have the Discipline to Avoid Running Up New Debt During that Time
- Your Credit is Good Enough to Get a Balance Transfer
If that sounds like you, a balance transfer might be the tool you need to reduce your credit card debts.
How Does A Balance Transfer Work?
Using a balance transfer card involves several steps:
- Look for the balance transfer card that you want to use. Check several options and review their features carefully. Look at the fees and potential penalty clauses. Look at the qualifications and avoid applying for cards unless you are fairly sure you’ll be approved. Many balance transfer cards require good or excellent credit. Additionally, most creditors will only allow balance transfers to other card issuers.
- Have a plan to pay off the balances you transfer before the promotional period expires. Know exactly what you’ll need to pay every month and be sure you have the ability to make those payments. Once the promotional period is over, you’ll be back to paying the regular interest rate.
- Apply for the credit card. If you’re approved, note your credit limit. Make sure you have qualified for the low-interest or no-interest promotion and note its end date.
- Transfer the balances from the old cards onto the new one. Follow the instructions provided by the card’s issuer. The issuer of the new card will pay off your balance and it will appear on your new card. Keep your balances within your credit limit.
- Be sure to make all payments on your old cards until you verify that the balance transfers are complete. If you miss a payment your credit will be damaged, even if the account is subsequently paid off.
- Pay off your balances according to your plan. As long as you pay them off before the promotional period ends you can put your payments entirely toward the principal, not interest.
- Don’t miss a payment or pay late. Many balance transfer cards have penalty clauses that end the low-interest promotion if you make a late payment.
If you can complete that process, you can use that low or no interest promotional period to pay off your credit card debts without spending another dime on interest.
How a Balance Transfer Can Affect Your Credit
There are several ways that a balance transfer could affect your credit:
- Applying for a new card will place a hard inquiry on your record. Hard inquiries can affect your credit, so don’t apply unless you meet the issuer’s published criteria and you believe that you will be approved. A hard inquiry will be registered whether you are approved or not, and it’s wasted if your application is denied.
If you have placed other hard inquiries on your history recently you might want to wait to apply for a balance transfer card. A cluster of hard inquiries can have a more serious impact on your credit.
- Opening a new account will lower the average age of your credit accounts. Credit scoring models treat a higher average account age as an asset because it indicates that you’ve been managing credit for a longer period. Any new account will have an age of zero and will lower the average age of your credit accounts.
- Opening a new account will affect your credit utilization. Credit utilization is the percentage of your available credit that you use. It is a significant factor in calculating your credit score. The credit utilization rate on your credit card accounts is calculated by combining your combined credit card balance and your combined credit card limit. Your balance as a percentage of your limit is your credit utilization rate.
When you add a new credit card your total credit limit will go up. If your balance stays the same, your credit utilization will drop. Keeping your old credit cards open but not using them will help you keep your credit utilization rate low, which may help your credit.
- Credit scoring models also look at your utilization for each of your cards. After you transfer your balances onto your balance transfer card it may have a balance close to its limit. A high utilization rate on one card could affect your credit.
As long as you make the payments on time and meet your goal of paying off your balance during the promotional period the overall impact on your credit should be positive. Paying off your credit card debt without interest is usually worth the possibility of a small initial negative impact on your credit, as long as you avoid the pitfalls of balance transfer cards.
The impact of a balance transfer card on your credit will ultimately depend on how well you manage the card.
Risks of a Balance Transfer Credit Card
If you carry out your plan and pay your balance off before the end of your new card’s low interest or no interest promotion, you will reduce or eliminate your credit card debt without paying interest. That’s a great outcome, but things don’t always work according to your plan. Here are some things that can go wrong.
- You could fail to consider the fees. Many balance transfer cards have annual fees, and some may also charge a fee every time you transfer a balance. These fees might also activate if you ever miss a payment during the promotional period. Make sure you make all your payments on time and that additional fees aren’t eating up your potential interest savings.
- You could miss a payment on your old card. The balance transfer process takes up to a week to complete, and if a payment falls due during that period you might think the balance transfer is complete and overlook it. That late payment could hurt your credit, even if the entire balance is subsequently paid off.
- You may keep spending on your old cards. The purpose of getting a balance transfer card is to remove those interest-bearing balances so you can focus on paying off the principal. That won’t work if you go out and load up your old cards again.
- You may use your new card to make new purchases. Your balance transfer card may offer zero interest on transferred balances during a promotional period, but it may not offer zero interest on purchases. If you want to pay off your credit card debts, you need to avoid accumulating new debts while you’re doing it.
- You may not be able to pay off the balances before the promotional period expires. If you don’t follow through on your payment plan, the promotional period could expire while you still have a significant balance on your balance transfer card. Depending on the terms of your card, you could find yourself paying even higher interest than you were before.
Many people who get a balance transfer card with good intentions fall into these traps. They often find themselves unable to pay off the balances they have transferred and sometimes end up even deeper in debt than they were before.
These outcomes are avoidable with good planning and good discipline. You will have to assess your ability to focus on the goal of paying off your credit card debts,
How to Use A Balance Transfer Safely
Using a balance transfer to reduce debt is all about exploiting the potential advantages of balance transfer cards while avoiding the pitfalls. These steps will help:
- Make every payment on time. Don’t think about paying the minimum: focus on the amount you need to pay to meet your schedule and pay those balances off within the promotional period. This includes your new balance transfer and on old debts on different cards.
- Avoid closing your old cards. Keeping your old cards open will lower your credit utilization rate and help your credit. Lock them up if you’re afraid that you’ll spend on them.
- Avoid applying for new credit until your old balances are paid. Focus on the task at hand: paying off those balances before the promotion expires.
- Avoid transferring installment loan balances to your card. Many issuers will allow you to transfer an installment loan balance to your new card, but that’s rarely a good idea. Installment loans usually have lower interest rates than credit cards, and if that balance is still on your card when the promotion expires you could be looking at a substantial rate hike.
These steps will help you manage your balance transfer card effectively and make sure its impact on your credit is positive.
A balance transfer card can be an effective way to consolidate your credit card debt on a single account and pay it off without interest.
A balance transfer can affect your credit in a few ways. The initial impact will come from a hard inquiry placed on your credit record, changes in the average age of your accounts, and adjustments in your credit utilization rate. This impact is likely to be small and temporary.
The more important impact on your credit will come from the way you manage your balance transfer card. If you stop making purchases, make every payment on time, and pay off your balances before the promotional period expires you may build your credit. If you manage your card poorly you could find yourself deeper in debt and place your credit under even greater stress.