Will a balance transfer improve your credit score?

When you’re struggling to get on top of your credit card debt, one solution that may offer some financial relief is a balance transfer. However, you may be curious as to how this may affect your credit history and score. Especially if your existing debt is already causing stress or has hurt your credit score.

Let’s take a look at how a balance transfer may affect your credit score.

What is a balance transfer?

A balance transfer credit card is a type of card that allows someone to transfer the debt of an existing card onto this new card, which typically offers a zero per cent interest rate for a set period.

Once the zero per cent interest period ends, the balance transfer credit card will revert to a generally higher-than-average ongoing interest rate. This means that if you’re unable to pay off your original balance in the interest-free period, your debt will start to accrue interest again.

This allows the cardholder to pay off their existing debt on the balance transfer card without further accruing interest on the outstanding balance. This credit card may be one type of helpful debt management solution for Aussies struggling to get on top of their credit card balances.

Keep in mind that some balance transfer credit card issuers charge a balance transfer fee (generally around 1 - 3 per cent of the balance). The process of transferring your debt from one card to another may take several days and paying off your balance may take the entire balanced transfer period. So, if you’re looking for an immediate fix to your debt problems, you may want to consider alternative options.

Can a balance transfer affect my credit score?

Using a balance transfer credit card is the same as applying for and taking out any financial product. Meaning, it will be reflected on your credit history.

But a balance transfer credit card may affect your credit score in both positive and negative ways.

Positive impacts of a balance transfer card on credit score:

• Take control of your debt. Taking out a balance transfer card to pay off your debt, may fall under the category of ‘positive events’. Thanks to comprehensive credit reporting, your credit history no longer records just the negative events and credit applications you make. Positive occurrences, such as working to pay off a debt or removing a debt altogether, may now potentially boost your credit score.
• Regular repayments. Another positive event that may improve your credit score is the act of making regular repayments on your credit card. Late payments, or missing payments altogether, may be reflected in your credit history and have an adverse impact on your credit score – especially if a very late payment turns into a default. By making a debt payment plan and budgeting to pay off your card debt through a balance transfer, this may in turn improve your credit score.

Negative impacts of a balance transfer card on credit score:

• Rejected applications. Not unique to balance transfer credit cards but still worth noting, if you apply for a balance transfer credit card and are rejected, this may hurt your credit score. This is especially true if you make multiple applications, as this can show a level of financial carelessness and lead to application rejection. Be careful to read the terms and conditions carefully and understand the eligibility criteria of a balance transfer card before applying and try to apply for only one credit card at a time.

• Multiple balance transfers. Not only can multiple applications and rejections hurt your score, but if you’re opening multiple balance transfer credit cards, this may also display a lack of control of your finances. If you’re struggling to pay off your credit card debt, consider opting for a balance transfer with a lengthy zero per cent interest period, such as two or more years. And if you know your balance transfer period is coming to an end, consider reaching out to the card issuer and requesting hardship support.

Ultimately, a balance transfer credit card may improve your credit score if used responsibly and you attempt to pay off your balance in full by the end of the interest-free period. Before you apply for a balance transfer card, consider setting a careful budget by cutting out frivolous spending. Focus on paying off your balance to the best of your ability so you can get your finances and your credit score back on track.