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Balance transfer is a credit facility offered by financial institutes to card holders to transfer their existing debt amount to another account with lower interest rates. This facility is very popular among card holders as it allows them to save money by availing themselves of lower or zero interest rates offered by the credit card companies. On the other hand, companies use this policy to attract customers towards themselves for business purposes.
Balance transfer has an effect on the credit score of the customer. Before understanding the process we need to first have a brief understanding of the different aspects of balance transfer.
- Balance transfer fee
- Introductory period of low interest rates as offered by the bank.
- Annual fees charged for holding a balance transfer account.
If the above aspects of balance transfer are not kept in mind then it would lead to a huge accumulation of charges that would increase the credit limit.
Balance transfer from an account of higher interest rate to a lower interest rate is beneficial in saving our money. One must however remember that it also has an effect on the credit score.
In this case the score gets calculated on the basis of the number of credit lines and the period for which the lines remained open. In case a customer closes a credit card account after transferring the balance then this would lead to negative scoring.
In case the customer holds a number of credit lines, when an inquiry is placed a number of companies file their reply. This gives a bad impression of the debtor showing that he has been scrambling for credit lines.
When computing a credit score the amount of credit available and the amount of credit used is taken in to consideration. So, when the balance gets transferred to a new account this opens a new credit line. This also increases the credit availability while closing the old line would again decrease the amount availability. These factors on tallying give the credit score of a person.
Debt percentage is the amount of credit that is used. The lesser the usage the better will be the debt percentage and hence a positive credit score.
The option of balance transfer if used properly will not only help in producing financial benefits but also help in increasing your credit score.