What is a Balance Transfer?

A balance transfer allows you to move balances from one or more credit cards to another card, ideally with a lower interest rate. This tactic helps you save on interest instantly so that more of your payment goes toward your principal balance (the amount you owe).

Instead of juggling multiple credit cards, due dates, and payment amounts, your finances are streamlined into a single monthly payment. The best way to reveal the financial impact of balance transfers is through an example.

Example: Imagine you have two credit cards (Card A & Card B). You can afford to make $150 in payments monthly, so you break that amount among the two cards.

In total, you would pay $2,104 in interest, and it would take nearly (4) years to repay both debts.

Now, imagine you transfer these credit cards to a new, lower-rate card and continue to pay $150 monthly.

Instantly, you will begin saving money and ultimately save $1,488 in interest charges. Plus, you will pay the balance off over a year faster!

How a Balance Transfer Can Help Your Credit Score

When managed responsibly, a balance transfer can strengthen your credit report and improve your credit score. That’s because it directly affects two of the most significant factors that credit scoring models consider: your credit utilization ratio y payment history.

• Improved Credit Utilization Ratio: Your Credit Utilization Ratio (CUR) is a figure used by lenders that shows how much of your current credit you’re using or utilizing. To improve your CUR, you can either 1) decrease your outstanding credit balances or 2) increase your credit limits. A balance transfer can help you do both
  • Transferring high-interest balances to a lower-rate card reduces the amount of interest you owe monthly. That means more of your payment will go toward the amount owed – bringing your balance down quicker.
  • When you open a new, lower-rate credit card to transfer balances to, ask for a higher credit limit. The higher credit limit will instantly reduce your CUR and improve your credit score.
• Consistent Payment History: When you transfer high-interest balances to your new, lower-rate card, your payments will drop immediately. That means your monthly payments will be more affordable and you’ll be more likely to make on-time payments.
  • Payment history plays the most significant role in your credit score, accounting for 35%.

How a Balance Transfer May Temporarily Lower Your Credit Score

While the long-term effects of balance transfers can improve your credit history and score, it’s important to understand that your score may dip in the short term. There’s no need to panic. This sudden drop is usually temporary and is caused by two factors affecting your credit score: credit inquiries and the age of your accounts.

• Create a Hard Credit Inquiry:
  • Anytime you apply for a loan or credit card, lenders will pull your credit report to process the loan. When they do this, an inquiry will appear in your report. Inquiries are grouped into the “New Credit” section, which makes up about 10% of your credit score.
  • Credit scoring models and lenders view a bunch of hard inquiries within a short time as a sign that someone might be in financial trouble. However, if you rarely apply for new credit, a single inquiry should only result in a temporary drop.
• Lowers Average Account Age:
  • Credit scoring models look at the length of your credit accounts to determine how well you manage money over time. “Account Age” makes up roughly 15% of your credit score.
  • When you open a new credit card or loan, your average account age will immediately drop. However, this drop is usually temporary and will typically rebound as you begin making on-time payments with your new credit card.

Tips to Make the Most of a Balance Transfer

A balance transfer is a tool, and like any tool, it works best when used wisely. Follow these tips to make the most of your balance transfer and put its perks to your advantage.

• Make Every Payment on Time:
  • Payment history is the single biggest factor in your credit score. Missing even one payment can result in late fees and negatively impact your credit score. Setting up automatic payments can ensure you never miss a due date.
• Keep Old Cards Open:
  • It may be tempting to close cards you’ve paid off, but doing so can shorten your average account age on your credit report and reduce your available credit. Both factors affect your score. Keep your old cards open, but do not use them for purchases.
• Avoid Adding New Debt:
  • A balance transfer should give you breathing room, not create space for new spending. Commit to paying down your transferred balance and resist the temptation to run up charges on your new or old cards.

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Life has its ups and downs, and so will your credit score. While you might see a temporary dip in your score in the immediate wake of a balance transfer, the long-term benefits far outweigh the short-term costs. As long as you stick to responsible habits like budgeting, saving, and paying on time, you will see improvement in your score. Rather than worrying over small fluctuations, focus on the progress you’re making.

If you want to learn more about how a balance transfer could improve your financial situation and credit score, we’re here to help. Stop by any of our convenient branch locations or give us a call at 717-263-4444 to speak with a team member and explore your options.