Is it worth considering a credit card balance transfer?

A credit card balance transfer is a type of debt consolidation that can help you pay down your mounting credit card debt faster. It involves transferring your debt from one or more credit cards onto a new card with a temporary low interest rate to minimise your interest charges while you pay off your outstanding debt. 

Some lenders may charge no interest during the introductory or promotional period, enabling you to pay down your balance without any interest charges. However, your low introductory rate will revert to the original rate once the promotional period is over. To avoid being charged interest on your transferred balance, it may be best to pay off the debt before the end of the low-rate period. 

When may it be worth using a credit card balance transfer?

A credit card balance transfer can be a good way of clearing your debt if you choose a low interest rate deal with a reasonably long term to pay off the full amount owing. This can potentially make a positive impact on your credit score unless you struggle to clear your outstanding balance, or you continue spending, which could see you end up in a worse financial situation than before. 

Careful use of a balance transfer could help some cardholders to clear tricky, outstanding debts. For example, you may be stuck in a credit card debt spiral, where interest is being charged on your outstanding balance faster than you can afford to pay it off. Transferring your balance to a low or no interest card could give you some time to pay down this debt during the low-interest or interest-free period.

Paying off your outstanding debts like this can help to relieve some of the pressure from your budget and stress from your household, as there’s one less bill to pay. It can also make applying for credit in the future that little bit easier, as the fewer outstanding debts you owe, the lower your Debt To Income (DTI) ratio may be.

Is it bad to transfer credit card balances?

While it isn’t wrong to transfer your credit card balances to pay down your debt, it’s possible to make mistakes if you don’t understand how balance transfers work.

The no-interest or low-rate period on a balance transfer credit card is only for a limited time. Having a lower interest rate might tempt you into spending more, which may not leave any room for extra repayments to pay down your debt. Additionally, in many cases the lower balance transfer rate may only apply to the money you’ve transferred. You may still be charged interest at a higher rate on new purchases made with a balance transfer credit card, and the usual interest-free days on purchases may not apply.   

If you’re not cautious, you may accidentally sign up for a credit card that charges more interest than your old credit card after the introductory period is over. In this situation, you could end up being charged more interest on a bigger debt than before the balance transfer. 

Additionally, after transferring your balance, you may be tempted to put more spending onto your old credit card. Even if you pay off your transferred balance, you could still be left right back where you started. It’s often recommended to cut up your old credit card or hide it in the bottom drawer (or even in the freezer) after transferring the balance so you’re not tempted to spend more.

Does a credit card money transfer affect my credit score?

A credit card balance transfer could potentially affect your credit score, depending on its effect on your financial situation.

For instance, the money you save on interest with a balance transfer can help you reduce your outstanding debt faster, which can improve your credit score over time. Paying your credit card bill on time each month can also help boost your credit score.

On the other hand, if you miss your repayments or struggle to pay your bills on time, it will be recorded on your credit file and may pull down your credit score. 

It’s also possible that if you are unable to pay off your entire debt during the low-interest rate period, you may consider another balance transfer once your interest rate reverts to normal. Multiple credit card balance transfers over a short period could hurt your credit score indirectly as multiple credit applications over a short time might look bad on your credit report.

Another factor that might hurt your credit score after a balance transfer is the way you deal with your old cards. If you don’t close your old credit cards after having transferred your outstanding debts to a new card, it can have a negative effect on your credit score, unless you’re making regular repayments on all the open accounts. 

Cancelling your old credit cards might prevent you from accumulating additional debt. However, keeping existing accounts open can sometimes help your credit rating by keeping the average account age high. Therefore, you need to carefully weigh the pros and cons before deciding to close an existing credit card, as the payment history associated with the card will also be removed from your file. 

Lastly, while it’s recommended to shop around to get the best possible deal on a balance transfer card, making multiple credit card balance transfer applications can have a negative impact on your credit score. Whenever you apply for new credit, the creditor will pull out your credit file to determine your creditworthiness as a borrower, resulting in a hard inquiry. 

Such hard inquiries appear on your credit report and can have a negative effect on your credit rating. Therefore, it’s advisable to do your research before applying for a balance transfer card and to crunch the numbers to ensure you can pay off the transferred debt within the specified timeframe.

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