Balance transfers and your credit rating

24 December 2009

Balance transfers are a poplar and common choice for many people dealing with debt as it allows them to escape high interest rates and get ahead of their debt. However, this process is no miracle cure as it stills requires the original debt to be paid off, granted with a far lower interest rate attached. However, with so many people using this system, what is the affect on their credit rating?

Yet first things first, for those who are not aware a balance transfer is where you transfer a credit card debt from one card to a new card with a low introductory period interest rate, which usually last from six to twelve months before rising to a higher interest rate, although this is still lower than most existing credit cards. The intention is that you are now not simply repaying high interest rates every month but actually able to make significant repayments off your debt to rid yourself of it quickly.

So how does this chop-change approach affect credit ratings? Well it honestly depends on how cardholder behaves and how they repay their debt. Say you had a good credit rating the credit card you have transferred from; well it is actually advisable to keep this card open to simply retain the good credit rating and the credit history while paying off the transferred balance as quickly as possible. Of course, when you do a balance transfer there are ways to increase your debt percentage, which lowers your credit rating and should be avoided.

These include opening too many new credit cards, not making your repayments on time on either card or closing your existing credit card once the balance transfer has been made.

To explain this a bit clearer, this is a rough breakdown of how an individual's credit rating is made up:

Payment History - 35 per cent
Outstanding Debt - 30 per cent
Established Credit - 15 per cent
New Credit - 10 per cent
Type of Credit - 10 per cent

So what this indicates is that while balance transfers can potentially impact negatively on your credit rating, the most important aspect to consider is that you consistently make your repayments, that you have a strong history of repayments and that all outstanding debt is reduced as quickly as possible.

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