Balance Transfers and Your Credit Score

By Leni Parrish on March 1, 2010

To pay off debt faster and save a bit more money, people resort to balance transfers program of any bank where the interest rate is much lower than the existing card account. Some banks even offer 0% percent interest when you finally decide to take the leap to another financial institution. Keep in mind however that you also need to consider how the step may affect your credit score.

Some may not easily realize that balance transfers may cause some negative outcomes to your rating. While the formula to calculate credit scores is a top-secret, financial experts point out that these could be the factors by which credit bureaus come up with scores: 35% for payment history, 30% for outstanding balances, 15% for established credit, 10% for new credit and lastly, 10% for type of credit.

Just looking at the percentages, calculation mostly involves how good you are in paying your dues and how much debt you currently have. When you do balance transfers, do not make the mistake of closing out the old account immediately after the transfer to the new card. Because when you do terminate an account, the average age of your accounts becomes lower and that alone makes 15% of your credit score. Just the same, if almost all your credit lines are new and recent and you decide to close on older accounts after balance transfers, you significantly decrease the average length of time that you have had credit. This will result to an immediate decrease to your score, too. Additionally, your debt to credit ratio, which covers about 30% of your score, becomes smaller when you close accounts. This means your available credit is suddenly all used up even if there were no additional charges made after the transfer. On the other hand, should you decide to keep the old card open, it will appear that you owe a little less because your limit was made higher.

With these things in mind, your goal is to only utilize up to 30% of your available credits, considering all cards. Look out for transfer programs that will provide you with the best rates and allows you to leave old accounts open. If you can, also avoid charging to any of your cards until you have reached your goal of less than 30% utilization to see positive effects on your score.

In the end, not only you are able to control your spending, you also got receive a credit score that you deserve for making responsible financial decisions.

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