How Does a Balance Transfer Affect Your Credit Score?
Are U aiming to reduce your credit card debt? I mean, who isn’t, right?! You may be considering a credit card balance transfer. This usually involves moving a high-interest credit card debt to a card with a lower rate. You consolidate your debt and start paying it off at a lower interest rate.
We at UMe know U have questions – and we have answers! Together U + Me can work to keep you on track financially. =
Does a balance transfer affect your credit score? And is that a good or bad thing? Keep reading to learn more about how a balance transfer affects your credit score and the steps you can take to do things right.
Balance Transfer Basics
A balance transfer is when you take the balance (A.K.A. the debt you owe) on one or more accounts and transfer it to another account. In most cases, it involves moving high-interest debt to a credit card with better rates.
UMe Pro Tip: Our UMe Visa Credit Cards come with a fixed rate. This means zero surprise rate increases in the future for U!
You can use your existing UMe Visa Credit Card for a credit card balance transfer or open a whole new account. With either choice, at UMe, you can enjoy zero balance transfer fees and a low, *fixed* rate. We do this because we know that a balance transfer is usually part of a debt-reduction plan and we’re here to help!
Could a Balance Transfer Hurt My Credit Score?
As with most things in life, a credit balance transfer comes with ups and downs. Luckily, the downside is usually temporary. And that’s the way we like it!
A balance transfer could affect your credit score with a short-term ding. If you use the balance transfer to start paying down debt and start spending responsibly immediately and moving forward, that will be short-lived (it’ll be like a momentary SoCal snowfall that disappears before U know it!), and your score will start improving. The more debt you pay off, the higher your score will go!
Terms U Should Know: Hard Inquiry
The truth is, if you apply for a new credit card (as part of a balance transfer or otherwise), it will result in a ‘hard inquiry’ on your credit report. A hard inquiry will have a short-term impact on your credit score, meaning your score will likely go down a little bit. The inquiry itself stays on your report for two years, but the number-impact on your credit score will only be felt for a few months, provided you make (at least) minimum payments on time every time.
While you may have heard that multiple hard credit inquiries can be grouped together, this is only the case when applying for a mortgage or auto loan. Credit bureaus recognize that you may need to submit multiple applications in these cases and will usually treat them as a single inquiry. That rule does not hold true for credit card applications.
This is why U want to do your research and select the right card for a balance transfer. (Not to be biased or anything, but we are pretty confident that we have the right card for U! Can’t beat a fixed rate and no fees!)
Terms U Should Know: Credit History
Credit history is a record of how you’ve managed your debts to date. As you may have guessed, a long history of responsible credit use positively impacts your credit score.
When U open a new card for a balance transfer, your length of credit history will be affected. When the average age of your credit is reduced, your credit score can take a slight hit. This hit is minimal in the grand scheme of things and can be erased with good habits moving forward.
Could a Balance Transfer Help My Credit Score?
Drumroll please: Good news! Yes — a balance transfer can actually help your credit score! Of course, this relies on the balance transfer being the start of greater financial responsibility and a debt-reduction journey.
The main way a credit balance transfer can positively impact your credit score is by lowering your credit utilization rate. Your credit utilization rate is the amount of credit you’re currently using divided by the total amount you have available. Most experts recommend keeping your total credit utilization rate below 30%.
Credit Utilization IRL
What does all this mean and how does a balance transfer fit in? This calls for an IRL scenario:
Let’s say you have two credit cards. Your first card has a balance of $2,000 and a limit of $5,000. Your second card has a balance of $5,000 and a limit of $10,000.
Between these two cards, you would have a credit utilization rate of 47% (total balance [$7,000] divided by total available credit [$15,000]). A 47% utilization rate is clearly above the recommended 30%.
Now, let’s say you perform a balance transfer by opening a new card with an $8,000 limit. You move all of your debt to that card. Your credit utilization ratio is now down to 30% (total balance [$7,000] divided by total available credit [$23,000]).
This credit utilization rate looks better on your credit report, for sure! But, that’s only the beginning. As part of your debt-reduction plan, you are now able to pay down your $7,000 debt quicker thanks to the savings associated with your new card. Being debt free is the best boost for your credit score!
Take Advantage of the Balance Transfer Momentum
Success depends on making way for smart habits and responsible spending. A balance transfer is an excellent part of a debt-reduction plan but it is only one part.
A balance transfer can help U keep track of your debt, make timely payments, and save money on interest. If you’ve consolidated debt from multiple cards, it can make it easier for you to make on-time payments, which is one of the most important things you can do to improve your credit score!
UMe Pro Tips to help you stay on track:
- Don’t close old credit cards. Yup, we said it. To keep your average account age high and increase your credit history, it’s wise to keep old accounts open. But this doesn’t mean running up debt! You can keep a card open and never use it (as long as you’re not paying any fees to do so).
- Use your balance transfer card only to pay off the debt. Don’t look at the shiny new credit card and think about spending! It’s there to help you pay off your debt — and you should only use it for that.
- Set up good habits. You’ve taken a great step toward financial freedom! Now, consider what else you can do. Set up an auto payment on your balance transfer card. Establish a budget so you stay on track in the future.
UMe can help with all of the above— and more! Helping is our favorite and local member service is our specialty! We live, work, and play in Burbank, just like U! This makes us uniquely qualified to help you reach your financial goals. U+Me… we make a good team!
Balance Transfers With UMe
Now that you know more about how a balance transfer can affect your credit score, you may be ready to take the next step. UMe = U+Me, let’s do this together! Stop by our local branch in beautiful Magnolia Park, Burbank, send us an email, or call in! We can help U get started with a balance transfer so you’re on the road to financial freedom.
When you transfer your balance to a UMe Visa Rewards Credit Card, you’re guaranteed a low, fixed-rate, no fees, oh-so attractive rewards, enhanced card security, and the most excellent customer service!
So, get started today! We can help you transfer your balance in five simple steps.
Disclaimer: U matter to Me (all of us) at UMe — and that’s why we do our best to deliver helpful information on our blog. Please note the following: (1) UMe Credit Union works hard to make certain that the information we post here is as accurate as humanly possible. But as you know, information can change and evolve quickly. While we try to update the blog on a regular basis, the content of some older posts may not be correct or up-to-date. (2) Some destinations on the World Wide Web that we link you to will exist on external websites. UMe Credit Union does not officially endorse any connected sites, nor do/did we compensate or get compensated by any entities to be featured in our posts (unless otherwise noted). (3) Everyone’s situation is unique and we advise you to consult with our personal bankers or your finance, tax, or legal professional for advice individualized to you!