Understanding Balance Transfers

A balance transfer involves moving existing debts to a new credit card, often with a promotional annual percentage rate (APR) as low as 0% for a specified period. This can help you consolidate debt from multiple sources into one monthly payment, making it easier to manage and pay off your debt interest-free over 12 to 21 months, depending on the card.

Can a Balance Transfer Improve Your Credit?

Yes, a balance transfer can improve your credit score over time. Here’s how:

Lower Credit Utilization

Moving multiple debts to a single balance transfer credit card can decrease your overall credit utilization rate, which is the percentage of available revolving credit you’re using. Lower credit utilization can improve your credit scores.

For example, if you have two credit cards with a total credit limit of $4,000 and a combined balance of $2,500, your credit utilization rate is 63%. If you transfer these balances to a new card with a $5,000 limit, your total credit limit rises to $9,000, and your utilization drops to 28%, which is below the recommended 30% threshold.

Reduced Balance Over Time

The goal of a balance transfer card is to pay off debt at a lower cost. By taking advantage of the 0% APR period and using your interest savings to pay down the balance, your debt will decrease over time, positively impacting your credit score.

Streamlined Bills

Payment history accounts for 35% of your FICO® Score. Having just one credit card bill to pay each month, as opposed to several, may help ensure you make that payment on time, which can have the largest positive impact on your credit over time.

Can a Balance Transfer Hurt Your Credit?

While a balance transfer can be beneficial, it can also hurt your credit if not managed properly. Here’s what to watch out for:

Hard Inquiries

Applying for a balance transfer credit card results in a hard inquiry on your credit report. One hard inquiry can have a small, temporary effect on your scores, but multiple hard inquiries in a short time can have a greater negative effect. Compare card offers before submitting a full application and opt for just one card to keep inquiries to a minimum.

Lower Average Account Age

Opening a new balance transfer credit card could lower the average age of your accounts, which can negatively affect your credit score. Lenders value long credit histories because experienced borrowers are more likely to use their credit appropriately. Avoid closing older accounts around the time you open a new one to minimize the impact.

What to Do After a Balance Transfer

After completing a balance transfer, follow these steps to ensure you pay off your debt and maintain a strong credit score:

Pay Down Your Balance

Calculate how much you need to pay each month to get out of debt during the 0% APR period and stick to it. Track your progress and reward yourself at certain milestones to stay motivated.

Set Up Autopay

Make all your monthly payments on time to protect your credit score. Set up automatic payments from your checking account to your credit card for a specific amount each month. If you have extra funds, make additional payments to pay off the card faster.

Avoid Making Purchases with Your Balance Transfer Card

The best use of a balance transfer credit card is to pay off debt. Adding to that debt could make it more difficult to get rid of the balance before your promotional 0% APR offer ends.

Avoid Closing Old Credit Cards

Keep old, unused accounts open to maintain a long account history. If an account has a high annual fee, consider downgrading to a card with no fee instead of closing it.

Avoid Applying for New Credit

Limit the number of hard inquiries on your credit report and only apply for new credit when absolutely necessary.

Create a Budget

To avoid accruing additional debt, create a budget and regularly track your spending. This can help you identify and eliminate unnecessary expenses, quickly saving money.

The Bottom Line

The goal of a balance transfer credit card is to pay down credit card debt at a lower interest rate, helping you become debt-free faster. While you may see a short-term dip in your credit score, using a balance transfer card strategically can improve your finances overall. You’ll not only experience the credit score benefits of debt freedom but also the peace of mind it brings.

For expert mortgage services and financial advice, contact O1ne Mortgage at 213-732-3074. Our team is here to help you achieve your financial goals and secure a brighter future.