Balance transfer: How does it help improve your CIBIL score?

A balance transfer can help a borrower improve their CIBIL score if used in a smart way. Before that, let us understand what a balance transfer is. It is the transfer of balance (in part or full) from one account to another account usually that charges a lower rate of interest. But it is recommended to make consistent payments on new credit cards after the balance transfer is done.

This is because regular and timely payments show responsible financial behaviour and can substantially boost your credit score over a period of time.

These are some of the explanations because of which balance transfer can help improve a credit score.

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Balance transfer helps improve Cibil score

Consolidate into single debt: If you have multiple credit cards or loans with high-interest rates, transferring those balances to a single credit card with a lower interest rate can make it easier to manage your debt. 

This can prevent missed payments and reduce the overall interest that you pay, which impacts your credit score in a positive way.

Avoid new debt: Once balance transfer is done, avoid accumulating new debt on your old credit cards or taking out new loans. Opening new credit accounts soon after a balance transfer can adversely affect your credit score since it lowers the average age of your accounts and raises the number of hard inquiries on your credit report.

Lower credit utilisation ratio: Credit utilisation ratio is the amount of credit you're as compared to the total amount available to you. 

Transferring balances to a new card with a higher credit limit can decrease your credit utilisation ratio, which is beneficial for your credit score. Aim to keep your credit utilisation ratio below 30 percent for the best impact on your score.

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However, it is vital to regularly check your credit report to ensure that the balances on your old accounts are correctly reflected as cleared or transferred. You must dispute mistakes (if any) immediately to prevent them from negatively impacting your credit score.

Frequently Asked Questions

How does it help to consolidate multiple debts into a single debt?

If you have a number of loans with high interest rates, then you may consider transferring the balance from all of them into a single debt with a lower interest rate. That way it is more convenient and economical to manage your debt.

Why is it important to check the credit report after the balance transfer?

Checking the credit report is vital to ensure that the balances on your old accounts are correctly reflected as cleared or transferred. Also, if there are mistakes in the report, you can — and should — flag the mistakes as soon as you can to avoid your credit score being impacted adversely.

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How can you improve the credit score?

You can work on improving your credit score by making timely payments, reducing outstanding debt, and maintaining a healthy credit utilisation ratio (CUR) before applying for a car loan.

What is the key disadvantage of a low credit score?

One of the key disadvantages of a poor credit score is that the borrower is likely to get a loan at a higher interest rates even when a loan is approved. 

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Published: 03 May 2024, 10:00 AM IST