Types Of Balance Transfer Cards
Various banks and credit card companies offer balance transfer deals. Typically, these accounts fall into one of two categories: cards that are meant for the sole purpose of consolidating or restructuring debt and those that offer rewards programs and are meant for long-term use.
Before settling on one of those categories, consider how you intend to use the new account. Cards that are not designed solely for balance transfers have their drawbacks. For example, a rewards card might offer 12 to 15 months of 0% interest, whereas a card designed for debt consolidation and balance transfers might offer a low interest for a longer promotional period lasting up to 21 months. Its also important to note that certain balance transfer cards might waive the typical transfer fee.
One big advantage of balance transfer cards is the potential to greatly reduce the amount of interest you pay on your debt. By lowering interest, you have the opportunity to put more money toward the principal amount you owe and potentially pay off your debt faster than you would be able otherwise. The biggest drawback, however, is the possibility of mismanaging your credit cards and racking up more debt instead of paying it off.
How Can A Balance Transfer Affect My Credit Rating
Your credit file contains details of your entire credit history. It contains records of the type of credit youve been approved or rejected for, your payment history, enquiries about your credit score, the age of your accounts and credit usage. Each of these factors has an impact on your overall credit score. You can expect lenders to go through your credit file each time you apply for a new credit card.
Here are some of the ways a balance transfer credit card could affect your credit score:
Make Good Credit Management A Priority
As you work on paying off credit card debt, its crucial to make it a goal to use your credit cards responsibly going forward. This includes paying your bills on time and in full every month to avoid interest charges. It also means using a budget to ensure you dont end up overspending. It may also mean sticking to a debit card or cash.
As you work to get a handle on your spending, youll have a better chance of avoiding credit card debt in the future.
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What High Balances Mean For Your Credit Score
The level of debt, the second most significant factor that affects your credit score, is referred to as your , which is your credit card balances compared to your credit limits. Lower credit utilization is better because it demonstrates you can responsibly use credit and that you haven’t overextended yourself with high credit card balances. Thus, having lower credit card balances than your will reward you with higher credit scores. The opposite is also true. Higher credit card balances will lower your credit score.
How To Do A Balance Transfer With Wells Fargo
Balance transfers with Wells Fargo are available through your online Wells Fargo account when you follow these steps:
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How To Apply For A Balance Transfer Card
When shopping for balance transfer cards, look at the cards APR after the zero-interest promotional period ends, how long the promotional APR lasts, and any fees you may be charged when doing a balance transfer.
Visit, call, or search online with your bank or credit union. You can also check out NextAdvisors round-up of available balance transfer offers. Youre often able to qualify within minutes. Once you have your card, you can begin making transfers to the card account. Balance transfers can take time often up to three weeks. You typically cant transfer a balance from one card to another within the same banking group.
The types of debt you can transfer vary from one lender to the next. Depending on the card, you may transfer balances from personal loans, credit cards, student loans, auto loans, and home equity loans up to your available credit limit. Your credit limit is the amount you can spend based on your credit application and history.
Using An Existing Card For A Balance Transfer: Mixed Credit Score Impact
The effect of transferring a large balance onto an existing card depends on which credit score model is used to calculate your credit score.
If the relevant credit score model takes your total existing balances and divides them by the combined credit limits of all accounts, transferring your balance to another open card will have no effect on your credit score. As you are moving a balance to another card without adding any credit limit, the amount you owe divided by your available credit limits will stay the same after the transfer.
However, some credit score models will take an average of the credit utilization ratio for each credit card. Lets say you have a credit card with a $4000 balance and a $10000 credit limit and another credit card with a $2000 balance and a $5000 credit limit . Your average credit utilization per card would be calculated as 40% in this individual card credit score model.
Transferring $3000 of your balance on the first card to the other card will leave you with one card with a $1000 balance and $10000 limit and another card with a $5000 balance and $5000 limit . The average credit utilization ratio would be 55%.
Before you commit to a balance transfer, calculate the average credit utilizations for your individual cards before and after the transfer occurs to understand any potential negative effects to your credit score.
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How A Balance Transfer Can Help Your Credit Score
The simple act of performing a balance transfer isn’t going to affect your credit score much, if at all. The key to changing your credit score is to use the transfer to reduce your debt both in dollar terms and as a percentage of your available credit. Eliminating debt sends the kind of signals that result in better credit scores.
Every dollar you don’t have to pay in interest is a dollar you can use instead to pay down your debt. That allows you to shrink your debt faster and shrinking your debt is good for your credit. The amounts you owe account for 30% of your FICO credit score, and the dollar amount of your debt is a factor there. Another factor is your, or the percentage of your available credit that you’re using.
A good rule of thumb is to keep your credit utilization ratio below 30% at all times both on a per-card basis and across all of your cards. Adding a new card with a new line of credit reduces your overall credit utilization.
Lets say a consumer has two credit cards:
Card A: $5,000 limit with a $2,000 balance
Card B: $3,000 limit with a $1,000 balance
This consumer has a 40% utilization ratio on Card A, a 33% utilization ratio on Card B and an overall utilization ratio of 37.5% . On each card as well as overall, this consumers debt is over the 30% ceiling.
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Is A Balance Transfer A Good Idea
A balance transfer should save you money. If it doesn’t do at least that much, there’s really no point in doing one.
For example, lets say youre carrying a balance of $10,000 on a card that charges 15% interest, and your goal is to pay it off in the next 12 months. If you just leave the debt on that card while you pay it off, you could expect to pay about $830 in interest. But move it to a card with a 0% APR for 12 months, and interest would cost you nothing.
Balance transfers don’t change the past. Missed payments on the old account will still affect your score.
Keep in mind that most cards charge a balance transfer fee of 3% to 5%. In this example, a 3% fee would cost you $300, so you’d come out $530 ahead.
When you transfer a balance, you are paying off existing debt with a new credit card. Assuming you move the debt to a card with a lower interest rate, it’ll cost less money to maintain that debt going forward. That means you can devote more money to paying down the principal on the debt, rather than paying interest.
When thinking in terms of your credit score, it’s important to understand what a balance transfer does not do:
It does not reduce the total amount of money you owe. If you owe $5,000 on one card and transfer it to a new card, you still have $5,000 in debt it’s just in a new place. You’re also still on the hook for any unpaid interest that accumulated on the account before you transferred the debt. That’s part of what you paid off with the new card.
Learn How A Balance Transfer Could Impact Your Credit Scores
May 4, 2021 |10 min read
You might be considering a balance transfer if youâre carrying a balance on one or more credit accounts. A balance transfer could help you consolidate debt or lower your interest rate on an existing balance. And that could help you save on interest and pay off your debt faster.
If youâre considering a balance transfer, you might be asking yourself, âDo balance transfers hurt credit?â The answer is complicated, and it depends on your unique situation. But by learning more about the processâand some credit basicsâyou can better understand how a balance transfer could impact your credit.
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How Consolidating Debts Closing Old Accounts And Applying For A New Balance Transfer Credit Card Can Impact Your Credit Rating
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When used correctly, balance transfer credit cards can help you repay your debt and improve your credit score as a result. But if you struggle to repay that debt or have other issues with your balance transfer, it could have a negative impact on your credit score. Here, we’ve unpacked how a balance transfer can affect your credit rating and what you can do to avoid a drop in your credit score.
How To Prevent A Negative Credit Rating
- Dont apply too often. When applying for credit cards, try to spread your applications over six months or one year periods. Applying for new cards over a longer period of time will have a less of an impact on your credit file.
- Review terms and conditions. Go through the balance transfer offer terms and conditions at the very onset. Youll need to confirm whether you meet all of the eligibility requirements, such as minimum income, credit score and residency, and that you have all of the required documents to ensure your application isnt rejected.
- Pay on time. Making a late payment can result in the termination of the promotional balance transfer offer, so do your best to repay your balance on time. By repaying the entire balance before the promotional period ends, you demonstrate your willingness and ability to repay outstanding debts.
- Avoid new purchases. Avoid making purchases during the balance transfer period, as this could increase your debt. Your repayments will automatically go towards whichever debt accrues a higher interest, which is more than likely going to be the purchase if a low or 0% balance transfer rate is in place. This means that youll be wasting funds you could be using to consolidate your debts to repay purchases.
Keeping in mind, your inability to repay your balance could have a negative impact on your credit score.
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How Does A Balance Transfer Affect My Credit Score
Like with any other credit card, making on-time payments is just as important with a balance transfer card. Your payment history counts as 35% of your credit score calculation, but hopefully with a balance transfer card it will be easier to pay on time since you aren’t racking up additional interest during that card’s specific 0% APR period. If you miss a payment, you may also risk losing out on the card’s 0% introductory offer.
Also, don’t forget that applying for a new credit card even a balance transfer card triggers a hard inquiry on your credit report.
“Hard inquiries serve as a timeline of when you have applied for new credit and may stay on your credit report for two years, although they typically only affect your credit scores for one year,” Anderson says. “This may lower your credit scores by a few points.”
But a balance transfer might impact your credit score favorably when it comes to your credit-to-debt ratio, or . By opening a new card, you’ll be increasing your total credit limit. In this case, you’ll want to remain vigilant about not racking up debt on your old card once your old balance returns to $0. If you can do this, you could see a positive uptick in your score since you’ll have more unutilized credit available than you did before.
What Is A Balance Transfer
A balance transfer is what it sounds like: transferring a balance from one or more credit card accounts to another account. The best balance transfer offers usually feature a 0 percent intro APR for a specified period, usually between 12 and 18 months. You will be allowed to transfer a preapproved amount of debt onto the card.
During the specified time range, interest charges wont accumulate and your debt wont grow. But afterward, the card issuer will begin to charge its usual interest rate on whatever debt remains. Also, if you miss a payment or make a payment late during that introductory period, you can lose your promotional period and get hit with the regular interest rate straight away.
Note that most balance transfer offers come with a balance transfer fee. These range from 3 percent to 5 percent of the amount of debt you are transferring.
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Balance Transfers And Your Credit Scores
Your credit scores are determined by a variety of factors, and a balance transfer may affect some of those factors. Here are the score components most likely to feel the negative effects of a balance transfer.
- , or how much of your credit youre using compared to how much you have available
- Length of credit history, or how long youve had credit lines open
- New credit, when you open new accounts
As you go through the steps involved in completing a balance transfer, your credit may be affected in different ways.
When you apply for the new credit card, the issuer will create a hard inquiry on your reports. This may lower your credit scores by a few points, and the inquiry may stay on your reports for about two years.
If your application is accepted, the new card will lower the average age of your accounts which can drop your scores by a few points as well.
If you end up with a new card, a balance transfer isnt necessarily all bad news for your credit. While your credit history takes a dip, your credit utilization may actually improve.
The new card will come with a brand-new credit limit. A higher total credit limit means that your debt will be a smaller percentage of your overall available credit, as long as you dont continue spending or close any of your existing credit cards. Thats good news for your credit utilization ratio!
More Accounts Can Lower Your Utilization
Although you might have a higher credit utilization ratio on your new card, your overall utilization rate will go down if you don’t use your cards more than you have been. Since your overall utilization rate is one of the major factors that affects your score, this could bring down your score after a while.
Don’t purchase more on credit simply because you have more cards. It’s important to charge only what you can afford to pay offand to keep your utilization rate low.
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Taking A Closer Look At Credit Utilization Rate
If you open another balance transfer credit card, youll need to be careful about what transferring your debts to another card might do to your credit utilization rate, also known as your debt-to-limit ratio. Your credit utilization rate is how much credit you have versus how much youre using. Or, more technically, the amount of outstanding balances on your cards divided by the sum of each cards limit.
Understanding your debt to limit ratio
- You have a $500 balance on your current card. This card has a $1,000 credit limit. Right now, your credit utilization rate is 50%.
- Now you transfer that $500 balance to another card with a $2,000 credit limit, which brings your credit utilization rate down to 25% .
However, if your new balance transfer credit card has a maximum limit of $2,000 and you transfer $2,000 worth of debt onto it, your credit utilization rate on your new card is now 100%.
As a rule of thumb, creditors like to see a credit utilization rate of 30% or less. You can see how youll need to consider both of your credit utilization situations on your old card and your new card to understand how it affects your score.
Whats more, a new credit card will reduce the average age of your credit accounts, and around 15% of your credit score depends on credit age.
If you do your research, compare your options, make a repayment plan and use your best judgment on future choices, a balance transfer card could be the first step toward financial freedom.