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Balance transfer on credit cards means moving the outstanding debt of one or more credit cards onto a new card which has a lower interest rate. This can be a useful tool for managing debt but it’s important to understand that this may affect your credit score, also known as CIBIL score, to some extent.
For instance, if someone has two credit cards with bills of ₹4.5 lakh each. The card holder can transfer the outstanding bills of these two cards to a third card whose maximum limit is, say, ₹12 lakh and the rate of interest is lower than that on the other two cards.
This way, not only does the cardholder pay a lower rate of interest, but also gets an extra time to clear the dues.
There are, however, several ways to minimise the impact of balance transfer on your CIBIL score.
This can be done by taking following steps:
Apply for transfer wisely: When you apply for a new credit card for balance transfers, try to choose offers where you have a high chances of approval.
Applying for multiple credit cards within a short period can negatively impact your credit score due to hard inquiries. So, limit your applications to those you’re most likely to qualify for.
Avoid closing old accounts: Remember that when you happen to close old credit card accounts, it can negatively impact your credit score by reducing your overall available credit and shortening your credit history. Instead of closing old accounts after transferring their balances, consider keeping them open, especially if they have a positive payment history.
Monitor credit utilisation: After transferring balances to a new card, be aware of your credit utilisation ratio. Ideally, try to keep your credit utilisation below 30 percent of your available credit limit on each card. Keeping credit utilisation low can positively impact your credit score.
ALSO READ: What is the ideal number of credit cards for a good credit score?
Make timely payments: Ensure that you make all payments on time, including the minimum payments on your old credit cards until their balances are fully transferred. Late payments can significantly impact your credit score.
While these strategies can help minimise the impact of balance transfers on your CIBIL score, it’s vital to remember that there may still be some impact.
Frequently Asked Questions:
How does reviewing credit score help?
It is vital to monitor CIBIL score regularly to track your progress and identify any changes.
Why is it important to pay bills on time?
Payment history is a significant factor in determining your credit score. Even a single missed or late payment can negatively impact your score.
Is it advisable to apply for a new credit application after balance transfer?
It is not recommended to apply for additional loan shortly after conducting credit card balance transfer. This is because multiple credit inquiries in a short period can adversely impact your credit score.
Is payment of debt enough to maintain a good CIBIL score?
Paying off debt is indispensable to maintain a good credit score. However, it is a responsible financial management that leads to a good CIBIL score.
Can there be mistakes in credit reports?
It is not uncommon to spot mistakes on credit reports. So, regularly checking your credit score allows you to spot any errors, such as inaccuracies in personal information or incorrect reporting of payments.
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Published: 03 Apr 2024, 12:21 PM IST
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