With multiple live credit card or loan accounts, a balance transfer looks like a good way to consolidate debt and pay off the outstanding amounts. While on the face of it, it is indeed so, remember that your credit score can be adversely impacted as well.
How a balance transfer affects your score depends upon several factors, including:
- The total amount transferred
- The new available credit limit
- Whether an existing card account has been closed
Opening new accounts - Let’s say a consumer initially applies for several cards with low introductory interest rates, owing to the attractive offers. The length of open accounts is one of the factors that affect your score and by opening multiple new accounts at once, your score can dip drastically, even if temporarily.
Inquiries against your account - Further, each time you apply for a loan or a card, an inquiry is made on your credit report by the lender. Every such inquiry has the potential to lower your score as it often indicates you pose a higher lending risk. If you really do need to apply for a new card or a balance transfer, try and apply for only one fresh account. Once you have transferred the balance to the new card, keep the old account open. Keeping an old account open is advisable as it helps to establish your credit history. Continue to make timely payments and maintain your score.
Credit utilisation limit - When you opt for a balance transfer, if possible, get approval on a card limit higher than the amount you need to transfer. Remember, the closer you are to exhausting your credit limit, that much lower will be your score. Hence to maintain it, try not to exceed 30% of your card limit. Once you make payments on time, and do not max out the limit, it can improve your credit score.
If you are considering a balance transfer, read the fine print carefully and understand all the costs involved prior to making the decision.