Balance Transfers and Their Effects on a User’s Credit Rating

Balance transfers can be an effective way of reducing credit card balances whilst enabling a cardholder to save on interest. This is especially the case for users with huge credit card balances.

Nevertheless, most card users rarely consider the effect that such a move will have on their credit rating and score, which ironically is dependent on how they manage their new and existing cards.

With a $5000 credit card debt and a credit line of $10000, for example, a cardholder would have a debt percentage of 50%. When a cardholder decides to acquire a new credit card and complete a balance transfer, it is important to consider the card debt, the credit line and the debt percentage of the new card and the old, unless the borrower chooses to close the older account.

When a consumer closes the original account and sticks with the new card, they have a lower credit line on the new card compared to the original one. They will also, therefore, have a higher debt percentage than they would have had if they kept the original account open. A higher debt percentage is not good for a consumer who is seeking to improve their credit score. When this is combine with the fact that the cardholder does not have an established payment history with the new card company, the credit score will be affected negatively.

Moreover, consumers with a new credit card which has an expansive credit limit are still advised to keep their old accounts open to increase their credit history. The credit score is improved because combining the credit lines in the two accounts against the debt in the new card significantly reduces the debt percentage and also the fact that the card holder had an already established payment history with the old card. It is therefore important for a card holder to avoid anything that would increase their debt percentage.

Moderation

Overzealous attempts to obtain more credit in the hope of reducing the debt percentage are not encouraged. It is advisable to try to pay off much of the debt rather than try to obtain more credit, since new credit cards will usually lower the credit score.

Vigilance

It is always wise to obtain enough information about such offers in order to make an informed decision. Offers should not to be tried without reading and understanding the terms and considering the effect it is likely to have on the credit score and rating.