Credit card transfer is a financial facility that, if utilized well, can get you out of debt quickly. On the other hand, balance transfers can push you further into debt. Before you sign up for balance transfer, consider the advantages vs. disadvantages of such cards. Also, it helps to be fully aware of how the transfer impacts on your credit score.
How Balance Transfer Affects Credit Scores
To start with, most card issuers put a cap on the credit scores that can qualify you for card transfers, typically 740 or more. Note, while a lower score can qualify you for transfers, the issuer may limit the cash amounts of transfers.
Since credit transfers involve closing existing card accounts and consolidating the debt in one or a few new cards, your credit score may suffer. The reason is that 15% of the score is determined by your credit history. Basically, credit card transfers reduce the average age of your credit history which in turn lowers your score.
Additionally, card issuers have to request your credit report to review your creditworthiness. Known as hard inquiries, the entries scrape off a few points from your score. What’s more, each hard inquiry takes up to 2 years to disappear from your credit report.
A credit card transfer can also improve your credit score. This is mainly through lowering the percentage of credit you utilize against your allowable limits. For this to work, you need to transfer your debts to a card that has a larger limit than the combined limit of the cards you want to close.
Pros of Credits Card Transfers
Consolidation of Debt
Transferring several credit amounts into one card is a form of debt consolidation. This comes with the advantage of concentrating on making payment on a single debt. You’ll be dealing with a single due date which is easier to remember.
Save on Interest
Any chance of saving money should be welcome, which is exactly what credit card transfer offer. Typically, balance transfer cards have a very low interest rate. This is in contrast to basic credit cards that have an APR of up to 24%.
With credit transfer introductory offers of as low as 0% APR, it means that every penny you pay reduces your debt. As such, you are able to clear the principal amount faster.
Lower Utilization of Credit
When your transfer card is approved, your total credit limit increases by the limit of the new card. Consequently, this also means that your previous cards will then have zero balances while the total credit available shoots up.
The sum total of these changes is that your utilization ratio drops. Additionally, as long as you don’t apply for new lines of credit, your utilization rate should increase with every payment.
Getting a Favorable Card
Low interest rate is not the only driving factor for consolidating your credit card debts. There are cards that offer other perks including online shopping rewards, cashback offers, and cell phone protection plans. These are perks that can save you money in the long run. Other incentives to lookout for include rental car coverage and trip cancellation insurance.
Note: The perks are on the condition that you pay for specific services using the transfer card.
Cons of Credits Card Transfers
High Ongoing Interest Rates
While you can expect a low APR, the offer will most likely not last forever. Normally, the interest rate you see on the adverts is introductory, lasting 6 months to around 2 years. However, after the promotion period is over, the APR can be higher than the charges from the previous cards.
High Balance Transfer Fees
To consolidate your debt, the issuers of credit card transfers charge a fee for the service. The fee is usually a percentage (up to 5%) of the total dollar amount you are looking to transfer.
The approval process for a transfer card is the same as that of other cards. Your credit scores plus a host of other factors come into play. So, depending on how the issuer gauges your creditworthiness, you may end up with a lower credit limit on the new card.
Getting into More Debt
Once you have the transfer card in your hands, it’s you alone to control how the card is used. Without discipline, the new credit limit at your fingertips can be tempting, digging you deeper into debt.
Balance transfers are perfect for getting you out of debt. However, like any other credit cards, if used irresponsibly, the transfer can damage your credit. Even with a 0% introductory offer, the ongoing APR can be so high that unpaid balances accrues more money that you saved during the initial introductory period.