How will a balance transfer affect my credit rating?

14 September 2016
Under the right circumstances, a credit card balance transfer can be a good way to pay down credit card debt, however, it’s important to ensure you regularly check your credit score to prevent any hidden shocks.

What is a credit card balance transfer?

A credit card balance transfer means transferring your credit card debt to a new credit card with a lower (or zero percent) interest rate so that you can afford to pay it off. This lower interest rate is often a promotional rate, and you need to pay off the debt before the end of the low-rate or promotional period or else you’ll be charged a higher interest rate. Balance transfers are a good way of paying off debt if you choose a low interest deal with enough time to pay it, however people may fall into the trap of continually transferring their debts to different cards, incurring unnecessary fees and affecting their credit rating.

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What is my credit rating?

A credit rating directly influences the amount of credit that is made available to a customer and the terms (interest rate, etc.) that lenders may offer. Checking it regularly is a vital part of understanding your credit health as lenders use this information to decide if lending you capital is worth the risk. Your credit rating is rated in between a calculated range (determined by the scoring model) and demonstrates your ability to meet financial obligations and pay back credit when due. A higher score means you have a good credit rating, with a lower score meaning you have a bad credit rating.

How will a balance transfer affect my credit rating?

Depending on several factors, balance transfers can either help your credit or hurt it. By initially applying for several different cards with low introductory rates, you can negatively affect your credit, so ensure you do your research!  .

Here are some of the main ways a balance transfer could affect your credit rating:

  • Status and number of applications. If you apply for a balance transfer and are rejected, this will have a negative impact on your account. Applying for several credit cards at the same time or within a short period of time will have a similar outcome on your file.
  • Repayment history. If you are approved for a balance transfer but are unable to meet the regular minimum repayments and can’t repay your balance by the end of the promotional period, thereby increasing your level of debt, this could have a negative impact on your credit score.
  • Remaining accounts. If you fail to close your old account after you’ve transferred your balance to a new card, this can have a negative impact on your credit score unless you’re making regularly repayments on both accounts.
  • Multiple transfers. If you’re unable to repay your debt by the end of the promotional period and have to move the remaining amount to another balance transfer credit card, this can also look bad on your credit file.

Example: How is a VedaScore calculated?

Credit card veda

Veda is one of the main credit reporting agencies in Australia (check out the other main credit reporting services here).  Your VedaScore, which is a numerical rating between 0-1200, is calculated based on the information held in your credit report at the time you apply for your report. Veda advises that your VedaScore is calculated based on information like:

How to prevent a negative credit rating

  • Don’t apply too often. When applying for credit cards, try to spread your applications over six months or one year periods. Applying for new cards over a longer period of time will have a less of an impact on your credit file.
  • Review terms and conditions. Go through the balance transfer offer terms and conditions at the very onset. You’ll need to confirm whether you meet all of the eligibility requirements, such as minimum income, credit score and residency, and that you have all of the required documents to ensure your application isn’t rejected.
  • Pay on time. Making a late payment can result in the termination of the promotional balance transfer offer, so do your best to repay your balance on time. By repaying the entire balance before the promotional period ends, you demonstrate your willingness and ability to repay outstanding debts.
  • Avoid new purchases. Avoid making purchases during the balance transfer period, as this could increase your debt. Your repayments will automatically go towards whichever debt accrues a higher interest, which is more than likely going to be the purchase if a low or 0% balance transfer rate is in place. This means that you’ll be wasting funds you could be using to consolidate your debts to repay purchases.

Keeping in mind, your inability to repay your balance could have a negative impact on your credit score.

Under the right circumstances, a balance transfer can be a good way to pay down credit card debt, however, it’s important that you consider all your options before making a decision. Take it slow with your application and make sure you budget effectively to ensure you pay off your debt in the required time frame.

Learn more about Credit Cards

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