Learning why a balance transfer may hurt your credit score.
A credit card balance transfer is usually done to take advantage of a lower rate of interest. When one credit card offers the facility of transferring your existence balance on your existing credit card by offering the lower rate of interest, you have the opportunity to save hundreds of dollars in interest rate. However even though you stand to save money in interest transferring the balance may hurt your credit score. In understand why your credit score may suffer due to a credit card balance transfer of it is first important to understand how credit score is calculated.
A credit score considers five main factors when calculating the number for a consumer. These five main factors are payment history, level of debt, age of credit, mix of credit and recent credit applications. Other these five factors payment history and level of debt are the two most important ones. When you do a credit card balance transfer the following factors get affected – level of debt, age of credit and recent credit application.
Credit Card Balance Transfer Increases the Debt Utilization
When you transfer a balance from one credit card to another you are doing three things, you are increasing your credit utilization on one card, and you are starting a new credit account and making a new application for credit. The credit score looks at debt level which means the amount of credit available to you and the portion of it that you utilize. It looks at the used up credit jointly as well as individually for each credit account. When you transfer a balance to a credit card, you may be charging it with a sum of money that may be close to its total credit limit. This results in higher debt utilization for that credit card which may hurt your credit score. This is true even if your total limit of debt utilization remains the same if the credit card is that you’re transferring the balance to be one of your existing credit cards and it is even more likely that you will be getting close to your total credit limit on that card after you make the balance transfer. If it is a new credit card that you are using to take advantage of a low promotional rate of interest you may come close to the credit limits if you continue to use that card for your other regular credit transactions as well. Ideally the debt utilization should be about 30% of the total credit limit of available as well as individually on each credit card.
Debt utilization makes up about 30% of your credit score.
Credit Card Balance Transfer Results in a New Enquiry
When you do a credit card balance transfer you may be applying for a new credit card that has come up with the promotional scheme of offering a low rate of interest a balance transfer. This results in a new Inquiries being made into your credit report. While most of the people do not have to worry about the Inquiries is being made into their credit report people with a marginal credit can have their credit score suffers if too many Inquiries are made in a short amount of time. However each Inquiries and credit application can make a difference off about five points or less to your credit score depending on the other information present in your credit report. Enquiries make up around 10% of your credit score.
Credit Card Balance Transfer Lowers the Age of Credit
The age of credit is the length of time that you have been using the credit for the longer the history of the credit account the more aged it is considered to be. The longer the age of credit account to more beneficial it is to your credit score as it shows more stability and pattern of payment. A credit card balance will only lower your each of creditor if the credit card you’re transferring to is a new account. Any new accounts that you open lowers the average age of your credit history stop in case it isn’t already existing credit card and account then the credit card balance transfer will not make any difference to the age of your credit.
Besides the effect on your credit score, you must also stop to consider the charges and the fees that will be levied on cue doing the balance transfer. The lower rate of interest on the new card should be what while the additional expense that you have to undertake to transfer the balance.