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Does a balance transfer affect your credit score?
Balance transfers are an excellent way to consolidate your debt and pay it off as quickly as possible. But, it does have positive and negative impacts on your credit score. Despite some minor negative impacts, balance transfers can immensely transform your credit score. Here’s how:
How does a balance transfer negatively affect your credit score?
A balance transfer can cause a dip in your credit score in the short run. When you apply for a balance transfer, lenders conduct a hard inquiry to determine if you’re a capable borrower. Hard inquiries remain on your credit report for about two years. Several hard inquiries show you’re seeking credit from too many sources, which could indicate you may not be a reliable borrower. This differs from a soft inquiry, which is when you check your credit or a lender is trying to pre-approve you. Soft inquiries do not affect your credit score.
Balance transfers can also lower your credit score by reducing the average age of your accounts. If you have three cards with an average account age of 48 months, and you decide to open a balance transfer card as your fourth, the average age of your accounts would lower, which could drop your score.
This has a minimal impact on your credit score, but it’s still critical to be aware of. It’s imperative to keep old, unused accounts open to maximize the average age of your accounts. But, if an old account has a high annual fee that you can’t afford, then it might be in your best interest to close it—weigh the pros and cons before closing the account.
How does a balance transfer positively affect your credit score?
Despite some hindrances, a balance transfer can considerably raise your credit score. Balance transfers reduce your credit utilization rate, which is the percentage of available credit that you’re using.
Low rates show that you’re not accumulating debt. Ideally, you want your credit utilization rate to be below 30%. For example, if you have multiple credit accounts and move the balances to a single account, your credit utilization rate shows as 0% on the old accounts. It’s crucial to take advantage of the 0% APR period so you can pay off your debt as soon as possible. This will then decrease your credit utilization rate over time.
Your credit utilization rate accounts for 30% of your FICO® Score, which is the score most used by lenders.
What should I do after I apply for a balance transfer?
After you’ve applied for a balance transfer, avoid applying for more credit. Limit the number of hard inquiries on your credit report as much as you can, and only apply for loans unless they’re necessary.
Don’t make purchases with your balance transfer card. The sole purpose of your card is to pay off debt, not accumulate more. When you add to that debt, it makes paying your balance during the 0% APR period more challenging. Create a budget to cut out unnecessary expenses and avoid accruing more debt.
Lastly, set up auto payments to ensure you’re paying your credit card bill on time each month. This boosts your credit even more—payment history accounts for a large portion of your FICO® Score. Choose a specific amount to transfer from your checking account to pay your bill. It should be enough to pay off your card within your 0% APR period.
Balance transfers can do wonders for your credit score, despite some drawbacks. When you use a balance transfer card responsibly, your credit score can grow in the long run. Check your spending habits, stick with your budget, and you’ll be debt-free in no time with a credit score on the rise.
If you’re ready get your finances in order, try a balance transfer.
Why get your credit card from a credit union?
In today’s market, there’s no shortage of credit card options, so it can be difficult to decide which one is the smartest choice. It’s always wise to shop around for the best deal, which, more often than not, is your local credit union.
Same function, better features
Why should you consider a credit card from a credit union over a big bank issued credit card? Here are a few things to keep in mind:
Better rates. Credit union credit cards carry an average annual percentage rate that can be several percentage points below those offered at big banks. In fact, federal law prohibits federal credit unions from charging interest rates higher than 18%. Big banks have no restrictions on the amount of interest they can charge their credit customers.
Lower fees and penalties. In addition to lower APRs, many credit unions waive balance transfer fees, and levy significantly lower over-limit, cash advance, and late payment fees. With all of your options, be sure you’re aware of the fees before you sign on the dotted line. One misstep could be especially costly.
Generous grace period. Credit unions typically extend a five-day grace period for late payments in comparison with one day at big banks, and most will give you a second chance before raising your interest rate. Over time, an increased interest rate adjustment can amount to a substantial penalty if you carry a balance each month.
Rewards programs. The same incentives provided by big bank credit cards are also offered through credit union credit cards. If points, travel, or gift cards are what makes you happy, you won’t have to sacrifice your favorite perks. Most of those bonuses come from the payment processor, like Visa or MasterCard, not from the card issuer, so rest assured your refund protection and car rental insurance can very possibly remain intact.
A strong competitive edge
Credit unions are able to offer more customer-friendly options and conveniences because they are owned by their members. They are not-for-profit organizations and, therefore, don’t need to maximize their revenue. In fact, profit on credit cards is used to provide lower mortgage rates and higher savings account rates to its members. In today’s cost-conscious market, their consumer-focused service and competitive products have earned them a substantial edge over the traditional big banks where profit is a top priority.
5 Tips for Making the Most of Your Rewards Credit Card
One of the best things about choosing to use a rewards credit card for your day-to-day spending is the points, miles or cash back you can earn every time you swipe. But it can be tricky. To make sure you’re getting the most out of your card, take a look at the tips below.
Pick a card that offers rewards you’ll actually use
It’s easy to get caught up in the excitement around a new card that’s just hit the market. But before you apply, consider whether the card comes with a rewards program that actually fits your lifestyle. Otherwise, you might get stuck with a bunch of points or miles that you’ll never redeem — something that happens to 1 in 5 consumers, according to NerdWallet’s research on reward cards.
Doing some digging upfront to find a card that will be valuable to you is the key to ensuring you’ll get the most out of your plastic.
Know your card’s rewards earning structure
By investing a little time in reading your card’s terms and conditions, you might find there are ways to score extra points on certain kinds of spending.
For example, it’s common for travel credit cards to award extra points or miles for every dollar spent on dining out. Consequently, using your travel card when you take your family out to dinner or pick up your morning coffee is a smart idea, because it will help you get to your next vacation faster. Knowledge is power, so get familiar with the ins and outs of how to maximize earning your rewards.
Budget carefully every month
If you’re carrying a balance on your card and justifying it with all the rewards you’re earning, here’s a wake-up call: You’re paying out much more than you’re bringing in. Most credit cards return only about 1% of your spending in rewards, and charge double-digit interest rates on unpaid balances.
To make the math work in your favor, stick to a budget so you don’t put more on your card than you can pay off each month.
Keep your account in good standing
One of the biggest mistakes you can make with a credit card is to fall behind on payments. Miss one and your account will no longer be in good standing and your ability to earn rewards could be jeopardized. Also, your credit score will suffer.
The solution? Pay your credit card bill on time each month, preferably in full but at least the minimum due. Online bill pay can make that process fast and easy.
Be smart about redeeming your rewards
Many rewards cards have multiple options when it comes time to redeem points or miles. For example, in some cases you’ll be able to choose between travel credits or merchandise.
However, it’s common for points or miles to vary substantially in value depending on how you cash them in. Before you go through with a rewards redemption, do the math to figure out which choice will give you the most bang per point. After all, there’s no sense in using your rewards on a vacuum when they would go further if redeemed for airfare.
Following these tips can help sweeten the treats a rewards card can provide while you navigate the tricky ins and outs of how it all works.
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Are points really worth it?
Are rewards programs worth the hassle- or the cost? That depends on you, and the types of rewards you’re working towards. For instance, airline miles are notoriously difficult to redeem…blackout dates, limited seats, and inconvenient flight times are just a few of the challenges. In comparison, hotel and merchandise points are relatively easy to earn and redeem, as are cash back rebates.
The offers can be so tempting
You’re spending money, so why not get something in return? It’s a great option for consumers who love to travel, can be flexible and are organized enough to keep track of the offers and deadlines. Even better are the points that can be redeemed for cash. It sounds too good to be true, but is the opportunity for rewards worth some of the trade-offs? Should you even consider a higher interest rate or an annual fee in exchange for a seemingly lucrative points program?
The answer is in the details
The key is having a clear and detailed understanding of the rewards program. Many programs set minimum spending requirement each month before points can be earned while others have minimum redemption requirements. Miles might only be redeemed on one named airline. Big cash back advertisements may be for a limited time or restricted to specific shopping categories. Each program is different and unique so heed the small print.
There’s also the credit card terms to consider. If you’re not able to pay off your credit card balance each month, the cash back bonus won’t make a dent in the interest you’re accruing, and some credit card companies charge a hefty annual fee.
Maximizing your benefit
To get the most benefit from a rewards program, you should plan to use your credit card frequently. You should also have your debt management well under control and be able to avoid accumulating any revolving debt as a result.
Ask any group of people why they chose a given credit card, and a vast majority will say it’s the rewards that reeled them in. For some consumers, they work. For others, they sound too good not to work. Understanding the details and knowing your own spending habits are what will help you choose the card that best suits your needs.
Five things you’ve got to do if you have a credit card
Establishing and managing good credit is an important responsibility in today’s world. Especially since your credit rating—that 3-digit number that defines your credit worthiness- depends on it. There are several factors that impact your credit rating, one of which is your credit card activity. We’ve come up with five best practices when tempted by the love of plastic money:
1. Watch your credit limit
Did you know that credit card companies start to monitor any account with a balance that’s more than 40% of the credit limit? Experts recommend keeping credit card utilization below 30 percent on each card and collectively. This shows lenders that you know how to spend responsibly and this can help raise your credit score. Anything more than that and it could indicate that you’re struggling financially and lenders might worry that you’ll have trouble paying it back.
2. Make your payments on time
If you’re late just one time, call the customer service representative and kindly ask if they’ll waive the late fee. If you’ve historically paid on time, they may do it as a courtesy. If you’re habitually late, it will cost you. Making your monthly payment on time impacts your credit rating, your interest rate, any promotions the company offers, and more.
We all slip up now and again, though. If you miss a payment, make it as quickly as possible because the amount of time really does matter. Paying five days late is better than paying 30 days late so act quickly—and then maybe think about signing up for auto pay.
3. Pay off your monthly balances in full
Paying off your monthly balance in full each month builds a practice of excellent credit habits. It will help to avoid late payments, unnecessary finance charges, and the accumulation of unnecessary debt. It will also benefit your credit score and keep your credit utilization ratio in check, which is an important factor in the calculation of your credit rating.
4. Open your statements!
Even if you pay your bills online, it’s important to view the activity on your monthly statements. Is there a random charge you didn’t authorize? Maybe a monthly subscription that you didn’t realize you agreed to? Has your payment due date changed? Is a promotional date ending or has there been a change in your interest rate or fees? Your statement includes lots of valuable information, much of which impacts your finances, so take a few minutes and read it carefully. We’re hoping not, but you may be surprised at what you find.
5. Store the customer service number, just in case
If your card is ever missing or stolen, the first thing you’ll need to do is report it to the credit card company so a hold can be put on the account. Without the physical card, however, you won’t have the customer service number. Write down the credit card name and customer service phone number now and keep it handy. If you choose to copy the credit card number, plan to put it in a safe place where it’s not easily accessible to just anyone.
Tips for how to get your credit card balances down
Revolving debt can wreak havoc on your financial health, especially when your spending is compounded by high interest charges. For many, it’s tough to regain control. Until you do, you’ll never be able to successfully manage your revolving credit and develop a realistic plan to reduce your debt.
Here are some tips to help get your credit card balances to a more manageable level and get your spending back in check:
Prioritize your debt. Your highest interest rate accounts are the ones that are have the strongest negative impact on your finances, so focus on them first. It might be tempting to simply pay off those pesky, little, low-interest balances, but stay on course. Managing your debt takes time and discipline. Having a plan of attack is critical.
Pay more than the required minimum payment. A specific amount of your payment is designated to pay down interest so you’ll need to make a bigger payment to reduce the outstanding principal. Curious about how long it will take to pay down your balance using different payment schedules? Check out one of the many online payment calculators to see which amount works best with your budget and goals.
Make a lump sum payment whenever possible. Did you get a bonus at work? How about your tax return? Those additional payments will make a substantial impact on lowering your outstanding balance.
Avoid additional fees at all costs. Companies make every effort to discourage delayed and missed payments as well as above credit limit spending, so consequential fees are typically an expensive slap on the hand. Be sure you’re organized in your bill paying and diligent about your limits so your hard earned money is not spent paying for something that can easily be avoided. Both of these oversights can cause an increase in your interest rate, which will obviously hinder your progress.
Leave your credit at home. When paying down your debt, the last thing you want to do is to increase your existing balance. Now is the time to seriously look at your budget and realistically consider what expenses you can afford. Without a credit card readily available, you’ll consider your purchases more carefully, especially when you’re paying with the cash you have on hand or with your debit card.
Ask for help. Georgia’s Own Credit Union has a Member Solutions department that is able to offer their members assistance in managing their debt. Sometimes it’s just too overwhelming. They’re experienced and knowledgeable representatives are there to answer your questions and help you put a realistic plan in place to get you back on your feet.