When you own several credit cards, you are actually juggling multiple payments, and the balances increasing by the day with the inclusion of interest charges, do not help things at all.
What do you do when you are confronted with such a situation?
Balance transfer is a good method by which you can attain your pay down goals. It lets you make low interest monthly payments so that your debts reduce faster. Balance transfer also helps you when your goal is to consolidate payments and pay off your debt with a single monthly payment, in place of paying multiple balances or making multiple payments each with its own due date. Before we go ahead with analysing the pros and cons of balance transfer, let us get down to basics.
A balance transfer happens when you remit or pay off the balances on your existing credit cards or loans by transferring them to another credit card account. Banks and credit card companies provide balance transfer facility that helps in transferring debt from one card to the other. It helps in consolidating the payments of all cards or loan EMIs, so that you do not have to keep a track of the different due dates.
Balance transfer also happens as a result of a good debt management strategy, but try not to make it a habit, if you do not want to have a large number of open credit lines. Balance transfer on your credit card can have an unfavourable impact on your credit score in the short term. If you keep certain things in mind while going about the act, you can minimise its impact in the long run.
If you have received a viable offer from a balance transfer credit card company and want to go ahead to make the application, the new card issuer, bank, or lending institution will request CIBIL for your credit score or credit report. Each time a lender initiates such a request to the credit bureau, it gets recorded on the CIBIL report as a hard enquiry.
Hard enquiries have the tendency of lowering your credit score by a bit each time. Hence, your CIBIL score reduces when you apply for a new card to initiate a balance transfer. The good news is that this effect only remains for a short period and your credit score will gradually increase again.
If used judiciously, a balance transfer can be a favourable method of paying down your credit card debt. When you initially apply for many different credit cards with low introductory rates of interest, it actually is detrimental to your credit score. This is because fifteen per cent of your credit score is based on the amount of time your credit accounts have been active. When you have these accounts for a longer duration, it helps you to maintain a better score.
Opening multiple accounts reduces the average age of your credit accounts and ends up spoiling your credit reputation. With each credit application, a hard inquiry takes place from the bank on your credit standing by means of your credit report. With every enquiry, your credit score reduces by some points. Multiple card applications from your end will lower your score even further by some margin. In order to mitigate these ill effects on your credit, make sure you do thorough research and check before applying for just one credit card.
So, how do you curtail the negative effects of balance transfer to a new card? Exercise caution and keep the old account open even after you have transferred the balances to a new card. By doing so you ensure that the average age of your account stays high as the age of the old account will also be taken into consideration when your credit report gets renewed.
If done the right way, balance transfers can improve your credit score in the long run if you are using it as a method to pay off your outstanding debt faster and more systematically. Make a balance transfer and then ensure that you make those payments in time before the repayment period is over, so that you can wipe out your bad credit history or improve it.
Here are the things that you must consider when a balance transfer is on your mind.
Will a balance transfer save me money?
You need to do a little research on the balance transfer service provider or the bank that you have opted for. Determine the rate of interest you are currently paying on your credit card and how much your bank will charge you in terms of fees and other charges such as a one-time fee. This will give you an idea of how much you will be able to save if you opt for a balance transfer. In case the amount of saving happens to be insignificant in the long run, there is no point in going through the balance transfer process.
How do I know how much balance I can transfer?
The transfer will be limited by the existing credit limit of your card. Hence, you must know how much credit limit you will be getting on your new card. Try moving balances smaller than the available limit to avoid any charges for going over the limit.
Will a balance transfer hurt my credit score?
If you make too many balance transfers too often, then you may actually be sending out unfavourable signals about yourself to potential creditors. It may seem to your creditors that you are not in a position to pay your bills in time and are just looking to move your high-interest debts to lower interest cards, and that you are less likely to pay off your balances very soon.
How do I judge if balance transfer is the right tool for me?
Balance transfer is useful for anyone looking to consolidate their debts. Further, if you have a high-interest credit card that has been mounting your debts, you may consider lowering the burden by transferring the balance to a lower interest card. You need to know how to make the most of the method without hurting your credit reputation. This is by paying off the debts within the due date before you are charged a higher percentage of interest. Create a repayment schedule for yourself and ensure that you stick to it and avoid any unnecessary expenses that can make your plans go for a toss.
How long will it take me to clear by balances on the new card after the balance transfer?
This will depend on the balance you have transferred and the amount you manage to shell out each month. In case you are only paying a minimum amount each month, you may be stretching the debt for a longer period and probably add on a further amount in the form of interest as debt. Balance transfer swings in your favour when you use it as a tool for repaying your debt on a lower interest card and not as a means of shuffling the debt from one card to another, giving a hint of unscrupulous behaviour on your part to your creditors.
