Are you thinking about transferring a balance from a high-interest credit card to one with lower interest rates? One question on your mind might be whether you should transfer that balance to one of your existing cards, or apply for a new credit card.
Each choice will affect your credit score in different ways, so let’s look at the pros and cons of each.
When you apply for new credit, whether or not you get the card, your credit score will take a small hit due to the credit inquiry. If you get the card, expect your score to drop more because you’ll have a “new account” in your credit file. New accounts are red flags to lenders and adversely affect your credit score for about six months.
However, there are many benefits to transferring your balance to a new credit card. Credit card companies frequently offer 0% interest on balance transfers on new cards for seven months to a year.
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Also, when you get a new credit card, you’ll have more available credit to your name. Your all-important debt-to-available credit ratio will rise, meaning you have less debt and more available credit. This ratio accounts for 30% of your credit score, so it’s an important factor to improve your credit score.
When you transfer a balance to a new card, you should keep your old card “open” with a zero balance for the greatest positive impact on your credit score.
In addition, when you apply for a new credit card you may get perks like bonus rewards.
There are also benefits to transferring a balance to an existing card. Because you already have the card, you don’t have to worry about shopping around for the best credit card offers or getting approved for a new card. Your credit score won’t be affected by a new credit inquiry or a new account.
Also, if you transfer a balance to an existing card with a zero percent interest rate and there’s already a balance on the card, your payments will be applied to the balance with the higher interest rate first. This is a new policy that is part of the Credit CARD Act of 2009, and benefits consumers. It helps tip the scales in favor of transferring a balance to an existing card if you can find a 0 % balance transfer offer.
When you transfer a balance to an existing card, you also won’t have “one more bill to pay.” Chances are, you have your online bill pay already set up for your existing credit card, and you’re accustomed to the due date. You won’t have to change your existing budget plans or remember to pay an additional bill each month.
The question of whether to do a balance transfer on an existing credit card or apply for new credit depends on a number of factors. It depends on:
- How much credit you currently have (because you don’t want to have too much available credit, which makes potential lenders hesitant to give you new loans and can also create a temptation to get deep into debt)
- Whether or not you intend to apply for a mortgage, car loan or personal loan within the next six months (since new credit adversely affects your credit score)
- If you can get a 0% balance transfer offer on your existing credit card
Whether you transfer a balance to a new credit card or an existing credit card to take advantage of low interest rates, make sure you don’t use the old card (which now has a zero balance) anymore, otherwise your debt situation will be worse than it was before you made any changes.
