Understanding the effect of balance transfer procedure on credit history
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Credit Card Applications » Research » Guides » Balance Transfer Cards » Understanding the effect of balance transfer procedure on credit history

Understanding the effect of balance transfer procedure on credit history

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Finding a solution to solve the debt situation is not a very simple task. Often it requires thorough research and careful planning to come out of debt completely. Credit card debt is particularly unnerving because every month, the outstanding balance grows with the addition of interest rates applied. Balance transfer may be a solution that can help an individual come clear of credit card debt, since it offers interest free period for up to 18 months. Balance transfer is when the outstanding balance of an old credit card is transferred onto a newly signed credit card. The owner of the credit card then pays the total amount due to the new credit card. The advantage of the offer here is the zero interest rates for up to 18 months, during which any payment made towards the credit card, will only be utilized to pay off outstanding balances. Balance transfer can be utilized effectively to pay off the credit card debts because the outstanding balance does not grow over time. If the older credit card has an interest rate of about 25%, then the amount saved on a balance transfer card is considerable. It is easier to pay off the balance in little amounts every month, without using the new card for any purchases. Balance transfer cards should not be used for new purchases, because until the older balance is paid off, any payments made will be routed to the debt. New purchases will then become outstanding balance, and higher interest rates will be charged to them. Balance transfer can affect the credit scores, since new credit cards account for 10% of the credit score. If the old credit card account is closed, this might further decrease the credit score, since the credit and debit ratio will be decreased. The individual will end up in more debt than the credit limit, thereby decreasing the credit scores considerably. However, being in debt decreases the credit scores constantly, and it is always ideal to make clearing the debt a top priority, which will automatically mend the credit report. Not closing the older account may be of some use, since the total available credit from both credit cards will be a slightly higher number. This will help maintaining the ratio of debit and credit, which can keep credit scores constant, if not increase them. But, it is very important not to use both cards simultaneously, since it can make the outstanding balance a bigger number. The balance transfer cards charge a greater interest rate for purchases made from the new card; therefore, it is always a good idea to take a break from spending with the credit cards until the balance is first paid off. The total amount spent must always be lesser than 30% of the credit limit available. This is ideal to maintain the credit scores and gradually increase them. Also, checking the credit reports regularly, will give a fair idea about the positives and the negatives of the credit report, which will help develop a sound financial plan.

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