Dear Clients and Friends of Cornerstone:
Opening a credit card and transferring balances can have a positive and a negative impact on your credit score depending on your credit behavior. This article gives you the long-term and short-term impact of doing so. We hope you will find it informative.
If you would like to refer back to any previous newsletters we have published, you can find them on our website. Please be sure to visit www.ccadvisors.com.
– Cornerstone Capital Advisors
How a Balance Transfer Can Increase Your Credit Score
By Mike Cetera · Bankrate.com
Monday, December 26, 2016
You can comfortably assume when you open a new credit card and transfer balances from one or several other cards to it, something will happen to your credit score.
Whether the impact is net positive or negative largely depends on your credit behavior after you open the new card.
But know that searching for and opening a new card could have an impact.
Here are two reasons why:
1. Inquiring about new credit and receiving new credit can lower your score.
The impact is generally small. If your score drops it “probably won’t drop much,” according to Fair Isaac Corp., which developed the popular FICO score. “If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report.”
2. Opening a new card could lower the average age of your accounts.
The length of your credit history accounts for 15 percent of your credit score. FICO takes into account several factors, including the age of your oldest account, the age of your newest account and the average age of all accounts.
How a balance transfer can help in the short
Having many accounts with a balance could hurt your credit score, so consolidating those accounts into one may help. How much you owe accounts for 30 percent of your credit score. There are a number of factors that go into this, as well, including:
- How many accounts in total have balances.
- How much of your total credit line is in use.
This is all about how risky you are to lenders.
“Someone who is close to ‘maxing out’ several credit cards has a high credit utilization ratio and may have trouble making payments in the future,” according to FICO.
Transferring a balance from many cards to one will reduce the number of accounts with balances. Getting the balance transfer card itself will boost your total credit line and lower your overall utilization ratio.
One additional bonus, “particularly if the new card has a lower interest rate, is that you might be able to pay off the balance faster because more will go to the principle amount,” according to the credit bureau Experian. “That could be a great gift during the holiday season.”
How a balance transfer can impact in the long-term
Over time, if you pay down your new balance and don’t add new charges, your credit score will reward you. But be wary about opening a balance transfer card if you can’t budget to pay off your debts.