Balance transfer cards enable you to shift a credit card balance from an account with a high Annual Percentage Rate (APR) to a new one that offers a 0 percent APR for a limited time. It’s essential to understand, however, that transferring a balance does not result in the closure of your original account; instead, the balance on the old card effectively becomes zero. So, what are the implications of transferring a balance between credit cards, and what should you do with your old card once the balance is cleared? While it may seem wise to close the old account to avoid accruing more debt, maintaining it can be a more beneficial strategy for many. Here are several factors to keep in mind regarding how a balance transfer affects your accounts and credit score, as well as recommended steps to take after completing the transfer.
What happens to your old credit card after a balance transfer?
What happens to your old card when you initiate a balance transfer? Once the transfer is complete, your balance will drop to zero, or to whatever amount remains if you couldn’t transfer the entire balance due to your new card’s transfer limit. In that case, you’ll need to continue making payments on the old card and won’t have the option to close it just yet.
If you manage to transfer the full amount and have the option to close the account, it’s generally better to keep it open to extend your credit history.
To maintain activity on the old card, consider setting up an automatic subscription payment, like Netflix or a newspaper delivery, and then enroll in autopay for the statement. This will help you keep a small amount of activity on the card and continue building a positive credit history. However, if the old card has a high annual fee or you’re worried about the temptation to overspend, you might be better off closing the account.
What happens to your new account once you pay off the balance?
Although you may have opened a balance transfer card solely to consolidate and pay off your debt, the account won’t automatically close once you pay off the balance.
Balance transfer cards often focus on offering a generous intro APR for balance transfers, but there are still good reasons to keep your new account open even after paying off your transferred balance.
Maintaining the new account can benefit your credit score. Additionally, you might earn modest rewards on future purchases or enjoy ongoing consumer protections depending on the card’s features. Demonstrating responsible usage of the card over time might even prompt the issuer to offer you another balance transfer opportunity in the future.
Balance transfers generally don’t have a long-term negative impact on your credit score. You’ll incur a new hard inquiry on your credit report when you apply for the card, which can temporarily lower your score. However, paying off your old card balance and increasing your available credit should improve your score in the long run.
Money Tip: If you’re preparing to apply for a mortgage, it’s best to avoid applying for any new credit, including credit cards. Even modest dings to your credit can affect your mortgage rate, significantly impacting the total interest you’ll pay over the life of the loan.
Questions to consider before canceling your new card or your old one
Applying for a new balance transfer credit card typically leaves you with a secondary credit card (your old card) that you no longer need. You’ve transferred your balances to the new card to take advantage of a 0 percent APR for a limited time, and it might be tempting to close the old account entirely.
Before you do that, consider some important questions, including how closing the old account will impact your credit in the long run.
What are some reasons to keep both accounts open?
There are several benefits to keeping both your old account and your new account open after transferring and paying off a balance. Having available credit improves your credit utilization ratio, which can boost your score and provide extra spending power if needed.
Additionally, the age of your oldest credit cards extends the average length of your credit history, accounting for 15 percent of your FICO credit score. Keeping your old account open can enhance your credit in this category without any effort on your part. Simply keep the account open and store the card somewhere safe for the long term.
What are some reasons to close your old account?
There are also valid reasons for considering the closure of your old card. For instance, you might want to close it if:
- The annual fee on either card doesn’t provide enough benefits to justify the cost.
- You’re worried about accumulating new debt.
- Managing multiple credit cards feels overwhelming.
In these situations, closing your old card, your new balance transfer card, or even both might be the right choice. However, be aware that this could lead to a temporary dip in your credit score.
What will happen when you cancel your new balance transfer credit card?
If you’re considering canceling your balance transfer credit card, it’s important to be aware of its potential temporary effects on your credit score. Closing a credit card can shorten the average length of your credit history, which may lead to a decrease in your score. However, closed accounts in good standing will remain on your credit report for up to 10 years, so the impact may not be immediate.
More significantly, closing a credit card can affect your credit utilization ratio by reducing the total amount of available credit. If you have balances on other cards, this reduction can increase your overall utilization rate, potentially harming your credit score.
In Conclusion
Closing a balance transfer card may cause a short-term decrease in your credit score, but it shouldn’t have a lasting negative impact on your credit in the future. Conversely, leaving the card open can beneficially contribute to your credit history and help keep your credit utilization ratio steady. Ultimately, the decision of how to proceed after a balance transfer is up to you, so it’s important to consider your options carefully.
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