Many credit card users move their credit balances from lender to lender every six to eighteen months in order gain more favourable interest rates. These are called balance transfers and though an individual may save money from lower interest rates, it could come at the expense of the person’s credit score.
The majority of credit bureaus and agencies calculate a person’s credit score using various mathematical formulas. The basic criteria, however is derived from the following:
By using regular balance transfers for credit cards between lenders the area’s above which are affected by this are – ‘age of credit’, ‘level of debt’ and ‘number of recent applications’.
When a credit agency calculates a person’s credit score, the credit card balances are looked at in relation to the overall credit limits on those cards. The ratio between the balance and the total credit available is called credit utilization and makes up about 30% of a person’s credit score. Where credit utilization is high, the lower the resulting credit score will be and if a balance transfer results in the balance moving from a credit card with a higher limit to one with a lower limit, the credit utilization will be higher, lowering the credit score in the process.
The age of credit accounts for about 15% of a person’s credit score and credit bureaus take into account the average length of any particular credit account. Therefore by using balance transfers between lenders means that opening new credit accounts will mean less ‘age of credit’ and a lower credit score.
Each application made to a lender, no matter what the person’s existing credit score or history will result in a small negative entry on a credit report. Recent credit applications can account of up to 10% of an individuals credit score and by using credit card balance transfers will mean a slightly diminished credit score. FICO state that such enquiries do not result in more than 5 points being deducted from a person’s credit score; however this figure will vary depending on the strength of that particular person’s credit history.
Before making a balance transfer it is worth working out the financial gain versus the credit score negative.
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