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Balance transfers are a very smart way of paying off your old debts without having to pay the higher interest rate that was a part of your old credit cards features. This is possible if the new credit card that you obtain has favorable terms such as a lower interest rate or higher credit limits. But before you go about doing this, you might first want to find out how it is going to affect your credit score.
The exact formula for calculating your credit score is not known to anyone but the credit bureaus. But the basic criteria or weight given to each component is known. It would be something like the payment of a customer would amount to 35%, the amounts owed would be 30%, the length of credit history would be 15%, the types of credit - 10% and any new credit would be 10%. Whenever you apply for a new credit card in order to make a balance transfer, it is important to take into consideration all the above factors.
The main reason one would go for a balance transfer would be to transfer the balance from a high interest rate card to a low interest rate care. There could be other factors such as a sudden financial crisis, sudden expenses related to personal festivities or ceremonies etc. but in any case, before going about the balance transfer, it is important to understand the repercussions if any.
Once you have moved your balance, do not close your old account. You might be anxious to do so, but you need to understand that closing the old account will hurt your debt to credit ratio. You need to maintain a favorable debt to credit ration in order to qualify for a good credit score. Getting your balances below thirty percent of the available credit will ensure that you have a good debt to credit ratio.
When you apply for a new card and open a new credit account, you will notice a slight increase in your credit score. if you leave the old card active, it will be favorable for your credit score. but do ensure that you do not make any more purchases given that you have a higher credit limit now that you have own two credit cards. This will only add to your debts. Always try and pay off your balance on time. And keep your balance to anywhere between 10% to 30% in order to gain the maximum credit score out of your account.
You might be enticed to use your new card due to all the rewards and points that they would offer you, but make sure that you first pay off your balance before you do so. Collecting rewards are a very good way of utilizing your credit card to the maximum, but do be aware that in the pursuit of rewards, you might end up ruining your credit score and hence your financial credibility. And defaulting on a payment is a sure fire way of ensuring that all your future credit transactions will be painful and time consuming.
