Many credit card companies use the introductory offers to attract you to their service. Since you probably already have one or more cards, these offers often include balance transfers. Balance transfers usually provide you the opportunity to consolidate your debt onto one card at a lower rate, sometimes even 0%! While this is definitely an attractive rate, you should keep in mind that it is almost always introductory, which means it might only last for six or twelve months. However, this gives you an opportunity to pay down your balances in a timely fashion and potentially save yourself hundreds of dollars.
Lower Rates, Lower Payments
Not only does transferring your credit card balances to one card potentially lower your interest, it can actually result in much lower payments. If you have four cards, this means that you have four different interest rates and four payment amounts and four due dates. These are three obvious reasons why you should consider consolidating your balances. With one card, you have one payment every month which is always due on the same day. This makes it easier to budget, and since your payment will likely be substantially lower than the total of four payments, you can pay far more than your minimum installment and improve your credit in the process.
In case you weren’t aware, credit cards do not simply carry one balance. While your billing statement might reflect the total available balance you have, this number is the accumulation of several accounts. Typically, there are three accounts on your card: balance transfers, cash advance, and new purchases. Before the new credit card regulations, companies could use your payments to pay down your lowest balances first, keeping your high-interest balances open, which ends up costing you more in the long run. Now, though, new regulations force these companies to pay down your highest balances first. This means that for the duration of your introductory 0% APR, you have an opportunity to pay off your high-interest balance.
Improving Your Credit Score
The credit bureaus and credit card companies take many things into consideration when determining your credit score, and therefore your eligibility. While there are many factors, a majority of their defining aspects is based on your ability and history of making payments. Not only is it important to pay your minimums, but is perhaps more important to pay as much as you can on top of them. You also need to make consistent payments that always beat your due date. The more you can do these two things, the higher your score will be.
The amount of your outstanding balance, then, is the other major component of deciding your credit score. The smaller your ratio of credit to debits is, the more scrutinized you will be. However, as you begin to make payments, your outstanding balances get smaller and this ratio gets larger, which falls favorably upon not only the credit bureaus, but on companies who could potentially offer you more credit. Ironically, the more available credit you have, the more likely it is that you can get more.
One important thing to remember when making balance transfers is that you should keep your old accounts open even though they carry no balance. In fact, you should keep several accounts open if they carry no balance because this actually improves your credit score. While your payment history and income are major components to opening a credit account, the amount of credit liability that you have is important to maintaining a low score. The more credit you have available, the better your credit score, most of the time. So, if you choose to transfer your balances to a card with a lower rate, there is a very good chance that leaving your card open will improve your liability, and thus your credit score. This is not always the case, so you should speak to someone qualified if you are unsure.
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