How does a Balance Transfer affect your Credit Rating?

Balance transfers are a useful way to consolidate, and ultimately reduce credit card debt. While they can save you a lot on interest repayments, it does lead to the question of how a balance transfer will affect your credit rating.

Debt Percentage; a Determining Factor of Credit Rating

The lower your debt percentage, the better your credit rating will be. Debt percentage is essentially how much you owe in relation to your credit limit. If, for example, you owed $2500 on a $5000 limit card, your debt percentage would be 50%. If you then transferred the $2500 to a credit card with a limit of $4000, your debt percentage would rise to 62.5%, even though the same amount is still owed.

There are no concrete rules as to what an acceptable debt percentage is, however the lower it is, the better it looks.
You can make a balance transfer work in the favour of your credit rating as well. If you transferred the same $2500 amount to a card with a limit of $10,000, your debt percentage would fall to $25%.

Therefore you must consider whether a balance transfer will increase or decrease your debt percentage, and whether it will have a positive, negative or neutral effect on your credit rating.

However, the advantage of having to pay off little or nothing on your interest repayments after undertaking a balance transfer ultimately outweighs the effect it will have on your credit rating. If you are frequently making balance transfers, just keep in mind your debt percentage.

Why can’t I simply apply for more credit cards, or increase my credit limit to improve my credit rating?
If you are hoping to increase your credit rating fast, then this is not an advised course of action. Typically credit scores take months, even years, to improve, and in the end applying for more credit may even damage your overall rating.

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