if you have a loan at a high-interest rate, a loan balance transfer facility can help you save some money by transferring your loan to a potential lender who is offering a lower interest rate. however, you should also keep in mind how the loan balance transfer will affect your credit score. on one hand, the loan balance transfer can give your credit score a boost, on the other hand, if managed poorly, it can cause severe damage to your credit score. read below to understand all about how a credit balance transfer affects your credit score:
a loan balance transfer refers to the process of moving your existing credit or loan balance to another account to gain some interest rate benefits.
a loan balance transfer will not affect your credit score in and of itself. however, it may bring some changes to the overall makeup of your credit report that may lead to a higher credit score. here are some examples:
1. lower credit utilization
your credit utilization rate, i.e., how much you use your available credit limit, is an important factor when it comes to your credit score. so, if you transfer your loan balance from one account to the other, it could lower your credit utilization rate and hence help you boost your credit score.
2. fewer accounts with balances
credit bureaus consider it better to have fewer accounts with balances than too many. hence, when you transfer your multiple debts and combine them into a single account, it helps you reduce the number of accounts with balances on your credit report. this could help you improve your credit score.
if you don't handle your loan balance process responsibly, it might lead to a lower credit score instead of a higher one. check out some of the examples below:
1. new hard credit inquiry
when you approach financial institutions for a loan balance transfer request, they would pull your credit score report to evaluate the risk involved in lending you the money. this process is known as a hard inquiry and every time a hard inquiry hits your credit report, your credit points drop a few points. credit inquiries are one of the major factors that affect your credit score. hence, you should be selective about when you apply for new credit. hard credit inquiries do not stay for longer on your credit report, hence, you can apply for new credits in a gap of say 10 to 12 months, but don’t overdo it. also, not every hard inquiry triggers a credit score drop, for example, pre-qualification. so, if you want to apply for a loan balance transfer, you can try to get a pre-qualification first to see if you have a chance of getting the credit approval.
2. length of credit history changes
your length of credit history is another important point considered by credit bureaus when they calculate your credit score. some of the key factors that play a role here include the age of your old accounts, the age of your new accounts, and the average age of all of your accounts. older accounts can help you get more credit scores whereas the addition of new credit accounts may trigger a small drop in your credit score. however, not that the length of your credit history is less influential compared to other factors such as payment history and credit utilization. as long as you keep these two perfect, the decline in your age of credit may not be a big worry.
3. problems caused by more debt
if you keep on adding new debts and transfer the balance to a new account, you could create a serious financial crisis. this shows irresponsible financial behavior and could also hurt your credit score. mounting debts every month could make it difficult to pay it back down the road. your payment history constitutes the most significant part of your credit score report.
a balance transfer, no matter what benefits it offers, is not the right fit for everyone. however, it may work for you under certain circumstances, for example, it can help you consolidate debt, save money, and pay down your high-interest debt. you should use loan balance transfers as a tool to help you pay down debt, and not a temptation to go further into the hole.
if you are unable to bear the burden of your current debts and the interest rates are too high, you can choose to go for a loan balance transfer. however, this decision should be taken only if there are no alternative ways such as asking your existing lender to lower the interest rate or giving you more time to clear off your dues. do remember that paying your debts on time is one of the most important steps that will improve your credit score.
check your credit score for free