Balance transfer products appear to be a brilliant solution to many of your financial issues, but it's important to note that all changes in how you use credit may affect your credit score.
With that in mind, it's clear that balance transfers between one credit card and another could potentially hurt your credit score.
Fortunately, though, a decrease in your credit score would probably only be temporary. Over time, your credit score could see a positive change due to the transfer.
The primary benefit of taking out a balance transfer card and transferring the balance from an existing credit card is that you can take advantage of a lower rate of interest. This is while consolidating your debts to reduce the number of repayments overall.
For example, if you owe money on several credit cards, you will have several payments to make every month as there will be one per card. Even if you only make the minimum payment for each, this will add up to a large hit to your budget.
If you consolidate all of the amounts owed on those credit cards to one single balance transfer credit card, you can better manage your total credit card debt.
Rather than making multiple payments for several credit cards each month, you can make one single payment to the balance transfer credit card provider.
Even considering the high credit card balance (and the balance transfer fee that will be incurred) on that one balance transfer card, the amount of repayment each month will be far lower overall than the total of your old multiple payments.
Furthermore, if the new credit card interest rate is lower, you'll probably be able to repay the total amount more quickly since a larger sum will go towards the principal amount, even when the balance transfer fee is factored in.
Potential lenders will check with agencies like Experian when you apply for any lines of credit.
When you carry out a transfer to a new balance transfer card from an existing credit card, a hard inquiry is likely to be added to your Experian credit file.
This could result in a small, temporary decrease in your credit score.
It's important to note that it won't hurt your credit score in the long term since you won't be taking on any new debts.
Also, assuming you've taken out a new balance transfer card, you'll be increasing the amount of credit available to you.
When you leave your old credit card account open but keep the amount of spending on all of your credit cards the same, the act of opening the balance transfer card account will decrease your credit utilization ratio (also known as the balance to limit ratio).
Lower credit utilization rates can give your credit score a boost.
The balance to limit ratio compares the balances on your accounts to the amount of credit you have available to you.
When your Experian and other agencies work out your credit score, it is done by looking at your credit utilization rate overall together with the credit utilization rate for each of your credit card accounts individually.
If each of your credit card accounts has a low balance to limit ratio and you also have a low utilisation rate overall across all of your credit cards, this indicates that you're a responsible borrower, and your credit rating will improve.
Usually, balance transfers won't cause you any issues and could offer you a host of benefits.
For example, if you carry out a balance transfer from high interest cards to low interest ones, you will save money. But there are situations in which balance transfers aren't such a good idea.
The most important thing to keep in mind is that once you transfer a balance of existing credit card debt from old cards to newly taken out balance transfer credit cards, you must not start to accumulate debt again on the original card from which you made the balance transfer.
When you're transferring a balance of the whole amount on your old card to a new credit card, you're increasing the amount of the available credit limit you have at your disposal.
It's no wonder, then, that it's so tempting to begin spending money on the original card and building up new debt.
However, keep in mind that you'll then have two credit card balances to pay each month. It will also increase your credit utilization rate as well as your debt.
This makes it hard to pay off the due balances and will almost certainly negatively affect your credit scores.
Keeping your old credit card account open as well as your new credit card account will help when it comes to your credit history since the average age of your accounts, and the length of credit history you've built up is important when determining overall credit scores in the credit scoring process used by credit reference agencies and card issuers.
But it will only help if you don't spend the total available credit limit that you have at your disposal.
Therefore, if you're moving money to balance transfer cards from other existing cards, you should be wary about using those old accounts.
If you decide to use them, don't use up more of the credit limit than you can afford to pay off in full each billing cycle.
If you can pay the card off in full each month, you won't carry a balance, and therefore you won't have to pay any interest rate charges, which may lower your credit score.
There are several ways you can minimise the negative impact of transferring balances between cards.
Firstly, avoid applying for several cards at once since doing so will make several hard inquiries appear on your credit report, which will negatively impact credit scores.
This is because lenders will think you are struggling with your personal finance and cannot manage money effectively.
This will then make you appear to be a lending risk, and you are unlikely to be approved for any new card or loan you apply for.
Instead of making applications for several cards to check which ones you'd be approved for, do your research well to find the best new card to meet your transfer needs and only apply for that one. Checking with Experian or another credit reference agency to determine your rating is a good way to see which cards you're likely to get approved for.
Secondly, along with your payment history, the average age of your accounts matters when it comes to your credit report.
That means if you close a number of cards you've held for years, when you take out your balance transfer card, there may be an impact for a short period of time on your credit score since the reduced age of your account will show up on your credit report.
Thirdly, a new card for a balance transfer can help you repay your debt faster since there is often a period of interest rates at 0% APR.
This allows you to pay more towards your overall debt and potentially pay off the entirety of the debt before the end of the interest free period.
The best thing you can do if you carry out a balance transfer is to make sure that you take steps to ensure all of the debt is fully repaid when the period of 0% interest comes to an end.
This will help you avoid persistent debt on your card. You should always check the small print of the advertiser disclosure to ensure you know how long this period lasts.
Transferring balances between cards can indeed offer you several benefits, including lower monthly repayments, a speedier way to pay off your debts, and even the potential to improve your credit score.
However, there are some downsides to consider too - after all, remember that financial products like this are presented without warranty.
For a start, balance transfer fees will be incurred, so you will be increasing the total amount of debt you owe. Secondly, if you fail to properly manage your account, you may end up with a worse credit score than when you started.
The bottom line is, while these products appear to resolve a host of problems, you must do your research well and learn how to avoid causing yourself more issues that may impact your credit score before you take out a new card.