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How Balance Transfer Affects Your Credit Score?

IndianMoney.com Research Team | Updated On Friday, November 08,2019, 02:46 PM

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How Balance Transfer Affects Your Credit Score?

 

 

A balance transfer takes place when you transfer the outstanding balance of your credit card or home loan to a new lender for favorable interest rates or lower tenure. Financial institutions provide a balance transfer facility on credit cards that help you consolidate the entire pending amounts on different credit cards to a single account. Similarly, home loan balance transfers can also help you avail of a better interest rate with your new lender.

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How Balance Transfer Affects Your Credit Score?

Since pending dues can significantly affect your credit score, you can avail of a loan transfer to manage your finances efficiently and improve your credit score.

 Benefits Credit Card Balance Transfer:

Credit card balance transfer is the best way to deal with pending debts and pay off huge credit card bills. This is a convenient feature of credit cards that allows you to get rid of debt cycles that keeps on accumulating due to compounding of interest. Credit card balance transfer helps you in the following ways:

  • You can save the extra interest amount that you had to otherwise pay due to accumulation of interest on your pending credit card bill
  • Debts of more than one credit card can be accumulated and transferred to a single account
  • Cardholders get a buffer time to repay the outstanding balance. This bank charges zero or nominal fees during this period
  • The processing takes place quickly and cardholders can get rid of extra interest payment on their outstanding amounts.

But this step is effective only when the bank where you are transferring the balance is offering a lower interest rate than your existing bank. Initially, banks allow you to pay back the balance without charging any interest for the first few months. Some other banks levy a nominal interest for the first six months post the balance transfer. Depending on the bank to which you have transferred your balance, you may also get the EMI option to pay back the pending amount.

See Also: Check Credit Score Online

Effects of Credit Card Balance Transfer on your Credit Score:

  • As a borrower, you must be already aware that unpaid credit card dues and loan EMIs can bring down your credit score. So your credit score starts improving as soon as you start paying the debt back.
  • By the time you will clear your debt; your credit score will show considerable improvement.
  • You may also retain your credit card to make necessary payments like grocery and utility bills. However, make sure to clear all your pending bills before the billing cycle. Doing this will help you bring significant change to your credit score. The reason is the card on which you have a huge outstanding balance would lead to a lower credit score. But if you use the same card to make payments, it will help you to improve your credit score.

See Also: Credit Score India

What is Home Loan Balance Transfer?

Banks also have a facility that allows borrowers to transfer home loans to other lenders. The process is a convenient way to lower the interest rate you are currently paying. This is a convenient process to change the interest rate or tenure of your home loan by switching your loan to a new lender.  

Firstly, you have to submit an application requesting the transfer of loans to some other bank. Once the request is initiated, your bank will issue a statement containing the loan details and a letter of consent.  You need to submit your loan documents to your new lender and wait for the approval. Once your new lender is satisfied with your track record, it will sanction the outstanding loan amount to the previous bank for the closure of your home loan.

However, you must keep in mind that the transfer of loan to a new lender is similar to taking a fresh loan. This is beneficial for people who are paying high-interest rates on their loans and are looking to reduce their interest burden. You may also try a balance transfer during the initial years of your home loan as at this time it makes up 80% to 90% of your loan EMI.

See Also: Free Credit Score

How Does Home Loan Balance Transfer Affect Your Credit Score?

  • Checking your eligibility before applying for a home loan balance transfer is an absolute must as each rejection have to potential to bring down your credit score
  • If your new lender is offering you a lower tenure and higher EMI option on your balance transfer then you can go for it. this way you can pay back the remaining amount quickly and thus improve your credit score.

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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