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Potential Disadvantages of Balance Transfer Cards on Credit Score


Posted on November 3, 2011

When you are considering applying for a new credit card that offers balance transfer capabilities, it is important to consider the effect the balance transfer card will have on your finances in general – specifically your credit score.

In most cases, people will apply for a balance transfer credit card with the intention of relieving other credit card debts. For some, this may mean there is already a danger of having a low credit score due to slow payments or a lack of payment when they can’t keep up with their financial obligations. With a low credit score, there can be long-term financial problems and a balance transfer credit card can make the situation even worse.

Here are some additional considerations to make before applying for a new balance transfer credit card:

The Inquiry Will Hurt

When you apply for any credit card or line of financing, the lender will check into your history to determine if you are creditworthy. When you submit an application, the inquiry being made will impact your credit score. It may not make a big dent but if your credit score is already low, it could hurt you in the long run.

Your Ratios Will Change

Even if you get approval from the credit card provider for the new credit card, your credit rations will change. This is a part of the credit score calculation that makes up your score. Your credit utilization ratio involves how much credit you have available through your credit limits compared with how much of that credit you have already used.

Your Temptations May Be Too Strong

If you have been struggling with other credit card balances as the result of overspending, clearing those balances through a balance transfer card may prove to be a temptation you can’t resist. Once other card accounts have been cleared and you have more credit available for spending, you may find it hard to resist spending more than you can afford.

Card Limits May Not Be Beneficial

If you applied for a balance transfer credit card with a weak credit score, you may not be approved for a credit limit adequate to cover all of your other existing balances. For instance, you may be granted a credit limit of $500 but have $3000 worth of existing balances. It can be somewhat pointless to transfer only a portion of the balances from other cards, adding another monthly bill to your obligations.

Affordability Can Be an Issue

Balance transfer credit cards do not come free. Many carry annual fees and all involve cost for transferring balances. Additionally, balance transfer card offers typically start with a low promotional APR for a limited time. After the promotional rate expires, the annual interest rate will rise considerably. If card holders are not able to pay off the transferred balances within that time period, the card may become unaffordable.

Complicating the affordability issue, card holders who are not able to make payments on the new credit card will hurt their credit score even further should they default on their monthly payments. Interest rates could rise even higher and the debts resulting from credit cards could bring a credit score down low which impacts your financial life for up to seven years or longer.

Have a Reasonable Plan First

Balance transfer credit cards can be a great way to eliminate other credit card balances if you are properly prepared. Budgeting payments is one of the most important elements to make the balance transfer actions work to your benefit. You need to make sure you can afford a new credit card payment each month and that the card you choose has an affordable interest rate long after the promotional period has expired.

It will also be wise to order copies of your credit reports and score well before you plan to apply for the card so you are aware of where your credit presently stands. Make every effort to improve credit scores before submitting your new card application to ensure you will get the best deal and an adequate line of credit on the balance transfer credit card. If your credit score is below 700, it is suggested you work at increasing your credit score by making other creditor payments on time each month for several months and avoid applying for other financing as you work on boosting scores. Review credit reports for mistakes and dispute inaccurate information immediately.

With a plan and the knowledge you can afford a balance transfer credit card, you can be successful at reducing credit card balances and saving money at the same time. Balance transfer cards can also help improve your credit score over time if they are used in the right fashion. But just as important, any new credit card can be a detriment to your credit score and overall financial stability if used without a well-prepared financial plan.

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