Keeping on top of your credit card debt can be challenging if you have high interest charges. That’s where a balance transfer credit card can make a real difference. But do balance transfers hurt your credit score?
Let’s take a look at what the effect making a balance transfer would have on your credit score – and why you may want to do it anyway.
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How can balance transfers hurt your credit score?
The fact is that any change in the way you use credit can impact your credit score. When it comes to balance transfers, the good news is that the effect will only be temporary.
There are several factors that mean you may see a dip in your credit score when you make a balance transfer.
Getting a new card
Firstly, just by getting a new credit card, your credit score will be affected. If you are looking to reduce the cost of your borrowing, then getting a balance transfer card with a long interest-free period is a great way to do this. It gets you out from underneath higher interest charges and gives you some breathing room to pay down your balance.
However, applying for a new credit card may add an ‘inquiry’ to your credit file. You can minimise the impact by not applying for too many cards at once. Using an eligibility calculator can help you to see which cards are most likely to accept you.
Closing old credit accounts
The temptation when you transfer a balance across to a new card is to close down any old credit cards. However, one of the factors that make up your credit score is how long you’ve held certain financial products.
If you close several cards that you have held for a long time, then you could temporarily impact your credit score. Having said that, if you are worried about managing cards with multiple interest rates, then closing the accounts is still a good idea. Any impact will be temporary and you can rebuild over time.
Could you be rewarded for your everyday spending?
Rewards credit cards include schemes that reward you simply for using your credit card. When you spend money on a rewards card you could earn loyalty points, in-store vouchers airmiles, and more. MyWalletHero makes it easy for you to find a card that matches your spending habits so you can get the most value from your rewards.
How much of your credit limit you use can also have an impact. So another way a balance transfer can hurt your credit score is if it pushes your credit utilisation rate on that card above 30%.
Once again, this means that your credit score may drop in the beginning. But if you have a plan in place to pay off the balance quickly, you’ll find that your score will rebound over time.
Is a balance transfer a good idea?
Don’t let any of the above put you off the idea of a balance transfer. If you are struggling to keep up with the interest charges on your existing credit cards and finding your debt is becoming unmanageable, then getting a 0% balance transfer card could significantly reduce the cost of your borrowing.
In fact, balance transfers can improve your credit score in the long term if you make sure you pay down your outstanding debt.
As a general rule of thumb, a balance transfer is a good idea if you make a repayment plan and stick to it. Take note of how long the promotional interest-free period is on your chosen card. Then work out a payment schedule that means the balance will be paid off by the time the card switches back to its standard rate.
Also bear in mind that a lot of balance transfer cards carry a balance transfer fee. This is typically around 3% and is paid when you make the transfer.
If you are planning to get a balance transfer card, take a look at our top picks. We have rated the cards based on the length of the interest-free period, the balance transfer fee and the representative APR once the introductory period ends.
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