What is Balance Transfer?
Definition of Balance Transfer
This is a way to move the money you owe from one credit card to another. It's a bit like moving your things from one room to another.
Why would you want to do that? Well, some credit cards will let you transfer your balance and then give you a period of time where they charge you low interest or even no interest. This can help you save money if you're currently paying a lot of interest on another card.
However, there's usually a fee to do a balance transfer, so you'll want to make sure the amount you'll save on interest is more than the fee you have to pay. It's also important to have a plan to pay off the balance before the low-interest period ends.
3 things to know about Balance Transfers
- Lower Interest Rates: One of the main reasons people choose to do a balance transfer is to take advantage of a lower interest rate. Some credit cards offer promotional low or 0% interest periods on balance transfers, which can help you save money if you're currently paying high interest on another card.
- Transfer Fees Apply: While a balance transfer can save you money in interest, keep in mind most credit cards charge a fee to transfer a balance. This is usually a percentage of the total amount you're transferring. It's important to consider this fee to ensure the transfer still saves you money.
- Can Affect Credit Score: Balance transfers can impact your credit score in different ways. Initially, it might lower your score since applying for a new credit card might result in a hard inquiry on your credit report. However, if a balance transfer leads to lower credit utilization and enables you to pay off your debt more easily, it could improve your credit score in the long run.
Do Balance Transfers impact credit score?
When you move your credit card debt from one card to another, it can potentially have several effects on your credit score:
- Temporary Dip: When you apply for a new credit card to transfer a balance to, the lender might do a "hard inquiry" on your credit report to see if you're a reliable borrower. This might a small, temporary dip in your credit score.
- Credit Utilization: The balance transfer might affect your "credit utilization ratio," which is how much you owe compared to how much credit you have. If the transfer leads to you using a high percentage of your available credit on the new card, it could lower your score. But, if you're able to pay down your balance and keep it low, it could help improve your score over time. [1]
- Creating a Positive Payment History: If a lower interest rate from a balance transfer helps you pay off your debt faster, and you make those payments on time, this could benefit your credit score. Your payment history is a significant factor in calculating a credit score. [2]
Remember, everyone's credit history is unique, so the impact of a balance transfer can vary from person to person.
Citations
[1][2] https://www.myfico.com/credit-education/whats-in-your-credit-score
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