How Balance Transfer Affects Your Credit Score

January 20, 2022

Are you amongst personage who are in need of an infusion of lower interest rates to avail the best home loan balance transfer offers? If you are all set to access balance transfer loans, then you must be familiar with other perspectives too. Availing home loan balance transfer is not an easy feat as you have to contemplate the credit score too. Regardless of your credibility and financial stability, lenders fall for credit scores to approve balance transfers. You need to explore more to know how balance transfer and credit score are directly linked mutually. If you are looking for how balance transfer can affect your credit score, then you are at the dead right place as Urban Money  got it covered for you.

A home loan balance transfer is a foremost tactic for better debt management, but at the same time, it can affect credit score too. When you count on balance transfer, your credit utilization is altered which reflects as hard inquiries in your credit report. As a whole, if a home loan balance transfer helps in swiftly getting out from debt, simultaneously it will lower down your credit score too. But if you make on-time payments then this influence is covered up with a small-time period. Being a good borrower can help you in reaching the desirable credit score without making any extra effort. 

The balance transfer loans permit the borrowers to move their existing loan to a new loan account and lender, who offers a suitable interest rate. The fact is neither you get bonus points, nor do you lose points in terms of credit score by just moving your debt. Other factors equally affect the overall fall or drift of the credit score. So, use balance transfer as a pre-eminent opportunity for paying down the existing debt with high-interest rates. 

Here’s a rundown of the basics of how a home loan balance transfer affects the credit score.

What Happens in the Event of Balance Transfer?

When you receive a viable proposal from a bank or financial institution, you surely feel like going ahead with the balance transfer application. To process the application and depict applicants’ credibility, the lender requests a credit report of the applicant. Whenever the finance provider initiates such a request to the credit bureau, it is put down on your CIBIL report. The worst part about such initiated requests is they result in lowering down the tendency of your credit score. Each time such hard inquiries are added in the report, the credit score drops a bit more. So, we can say whenever you apply for a balance transfer and the lender initiates a request, somehow the credit score is adversely affected. Although the epitome is, it is a short-term effect and after a specific period, the score gradually increases. 

What are the Consequences of Balance Transfer Loans on Credit Score?

A home loan balance transfer can leave a great impact on your credit score if not considered cautiously. You need to prepare in advance for the consequences that you will encounter by opting for a balance transfer. Here is a quick go through of all such consequences:

  • The key influence of a home loan balance transfer is the centralization of debt. It permits the borrower to manage a sole loan with utmost ease rather than managing multiple loans. 
  • You get access to easier home loan repayment options at lower interest rates. It enables the borrower to repay the debt quickly at cheaper rates.
  • The chosen bank or financial institution initiates a credit check. This check results in adding ‘hard inquiry’ within the credit report. 
  • The new lender pays off the outstanding loan amount and you will be set free from the mounting loan and higher rate of interest.

What is the Influence of Balance Transfer on Credit Score?

When you use a balance transfer in a sapient way, it can emerge as a benign method to splurge the loan debt. In the first instance, when you apply for a home loan balance transfer with low-interest rates, it is ruinous to the credit score. This is so because 15% of the credit score represents the tenure when the credit accounts remain active. With long-term active loan accounts and timely payments, you can maintain a better credit score. 

Making multiple applications, to compare and avail best home loan balance transfer offers, can be detrimental and spoil the overall credit reputation among the lenders. Every application will add to a hard inquiry on the credit standing.  

When you make legion balance transfer loan applications, you yourself will be responsible for lowering the score further by a specific margin. To attenuate such effects from your credit report, consider exploring the available offers and cross-check minute basics before you apply for the home loan balance transfer. 

After knowing the actual influence of balance transfer, the very next crucial thing is to curtail the dismissive effects of home loan balance transfer offers. Exercise vigilance and avoid instant closure of the previous loan account. By exercising such a practice, the average time of the loan account stays high. The credit report equally considers the previous account tenure and adds a bit more to the score unless the report is renewed.

If performed appropriately, balance transfers loans can ameliorate the credit score in the long haul. Consider using balance transfers as a means to pay off the outstanding debt in a quick and systematic way. Count on balance transfer loans and make sure to make on-time payments notably before the end of the repayment period. When done in this way, you can blot out the bad credit history and at the same time can improve it.

Positive Aspects of Home Loan Balance Transfer On Credit Score

If there are negative aspects of balance transfer loans on credit score, then there exist positive aspects too. Below depicted are some of the major positive aspects you will notice on your credit score after relying on balance transfer:

  1. The most worthwhile effect of a home loan balance transfer is you become capable to pay off your home loan quicker with huge savings. A balance transfer is a foremost tool to save on repayments. With access to a lower rate of interest, you can clear all dues in reduced repayment tenure and at a lowered EMI amount. 
  2. The second great impact is seen on credit utilization. When the existing outstanding amount is transferred to the new loan account, there is no need to close old credit cards associated with that loan account. They will be active and available for use. It allows the borrower to access added credit limits. Although, never try to overuse the limit. Try to be in your credit line, it further helps in lowering down the credit utilization ratio. Moreover, it adds to improved credit scores. 
  3. The next critical positive impact is, with the timely repayment of consolidated debt, over time the credit score shows great drift. At the time of final loan closure, you will notice a considerable increase in credit score. 

You must be familiar with certain things, before relying on balance transfer loans. Here is a quick go through to all such essentials:

  • The interest rate offered by the new lender should be lower than the rate imposed by the previous lender. It must be low by at least 1 to 2%, then only considering balance transfer will be profitable. Otherwise, the idea of balance transfer loans wouldn’t be wise as you will have to pay more in terms of foreclosure and processing fees compared to the actual savings. 
  • If the key reason for balance transfer is to consolidate the debt, the better option will be to opt for a personal loan. You can avail of a personal loan at cheaper interest rates for the long run. Additionally, you will get a simplified repayment schedule cutting down the foreclosure charges.
  • Take heed of charges that you might have to pay to the lender, bank, or finance provider against transferring the existing home loan. In certain cases, the home loan balance transfer offers seem so lucrative that you might fail to observe the one-time fee and charge that the lender asks for. These charges can be very high in certain events, specifically when the bank policies adjudge it as 1 to 3 percent of the total outstanding amount. 
  • You can take maximum possible advantage of the balance transfers by practicing conscientious behaviour. Pick the most appropriate lender for the balance transfer loans and save several thousands on what you had paid in terms of interest to the existing lender. Try making small pre-payments in mid-cycle to enhance the overall credit report and at the same time reduce the outstanding principal amount. However, on-time repayments together with the controlled credit utilization add to good credibility. 

What to do Afterwards Balance Transfer Loans?

If you don’t want to sink into debt, you must follow certain steps after the completion of the balance transfer home loan procedure:

Avoid the closure of other loan accounts:

In general, the best practice is to keep unused and obsolete accounts open. The vital one is the oldest one amongst all. The long repayment period, depicting on-time payments by the applicant, adds a lot to the credit report. Although, if they are charging huge interest rates then choosing a diminished credit score will be better than high repayments. 

Avoid making multiple applications:

Freeze numerous hard inquiries present on the credit report by restricting the number of multiple applications. Apply for balance transfer loans when absolutely needed. 

Put up autopay & construct a budget:

Make monthly repayments on time, as it helps in maintaining a good credit score. This is so because the major percentage of credit score comprises the payment history. To eliminate the accruing debt, consider constructing a monthly budget and keep track of your expenses on a regular basis. 

How to Perform Home Loan Balance Transfer Without Affecting the Credit Score

To carry forward home loan balance transfer while safekeeping the credit score, stick to plain sailing guidelines:

Apply for a balance transfer that is compatible with your needs

It is a bit strenuous to know in advance how much amount you are eligible to borrow. Your credibility helps in determining whether your outstanding amount is eligible for balance transfer or not. But it is recommended to steer clear of hedging bets in terms of multiple balance transfer applications. 

Fight shy of transferring a loan balance up to the fullest of the new credit limit

If an applicant transfers an outstanding balance that maxes out the lender’s limit or is available at a higher utilization rate, it will result in influenced credit score. 

Wait unless the credit history is perfectly built up

If so, for you have a prolonged credit history including multiple credit cards, certain loans ongoing from more than three years, then balance transfer won’t create many effects on your credit score. But, if the lender is charging huge rates, then be better served by the new lender with nominal rates through balance transfer loans.

How to Build a Good Credit Score Following Balance Transfer

A home loan balance transfer can damage the credit score in certain ways. But regardless of the damage, it can be recovered easily over time through specific steps. The best way is to make each payment on time, every month and avoid delayed repayments. When you stick to this, your credit score will elevate to an excellent level with passing time and timely payments.

Rather than focusing only on how the home loan balance transfer affects the credit score, contemplate how to eliminate the debt which further affects the credibility and financial health. In certain events, a short-term boost in credit score can offer long-term benefits to the customer. So, think twice, consider all discussed factors and then count on home loan balance transfer home offers.

Bottom Line

Balance transfer loans are foremost debt-management gimmicks, yet you need to be cautious while exploring the best home loan balance transfer offers. Overall, it will be elite to avail the benefits of a balance transfer to the fullest. If the existing lender is not serving well, let the other better serve your needs. At the same time, don’t forget to consider your credit score. Take immediate steps such as restricting multiple loan applications, on-time payments to improve your credit score. Initially improve your credit score to get the balance transfer option effortlessly and then choose the best lender that meets your loan requirement at lower home loan interest rates. 

Frequently Asked Question (FAQs)

Do balance transfer loans hurt credit scores?

Balance transfer loans have positive as well as negative impacts on the credit score. All you can do is be cautious while evaluating the rough outcome before finalizing the decision of balance transfer. Have words with your lender and understand the imposed charges to exercise good judgment.

How long does a home loan balance transfer take?

A home loan balance transfer usually takes 3-4 business days after the final approval and verification of documents.

What is the eligibility for balance transfer loans?

A borrower with a good credit score, and on-time repayment record is eligible for balance transfer loans. You will have to submit a specific set of documents to the lender for the verification process and based upon these factors you will get approval without any hindrance.

Is there a need for a healthy credit score to get approval for a home loan balance transfer?

Yes, having a healthy credit score is equally important to get balance transfer approval from the new lender. A credit score above 750 helps the lender to know the applicant’s credibility as well as trustworthiness. Additionally, the lender can examine the repayment records by referring to the credit report of the applicant. A good credit score helps in availing of loan transfers at lower interest rates resulting in huge savings.

Are balance transfer loans inferior for credit score?

Any minute change in credit utilization can affect credit score at significant levels. So, there are chances that the balance transfer generates a negative impact on the credit score. Although, any fall in credit score due to balance transfers is temporary and can be eliminated by timely repayments over time.

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Category:Home Loan

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