When You Do a Balance Transfer, Does It Close the Account?
Learn what happens to your credit accounts after a balance transfer. Understand their status and how to manage them effectively.
A balance transfer involves moving existing debt from one credit card to another, often to a new card offering a lower interest rate. This strategy aims to reduce interest costs and simplify debt repayment. Generally, completing a balance transfer does not automatically close the original credit card account.
Understanding Balance Transfers and Account Status
A balance transfer shifts high-interest credit card debt to an account with more favorable terms. The process involves the new credit card issuer directly paying off the balance on the original card. While the balance on the original card decreases, or even becomes zero, the account itself remains open and active.
Unless a cardholder explicitly requests closure, the original credit card account’s status remains unchanged by the transfer. Balance transfers incur a fee, ranging from 3% to 5% of the transferred amount, which is added to the new card’s balance. Promotional interest-free periods on the new card last between 6 to 21 months, allowing time to pay down the principal balance without accruing interest.
The Original Account After a Balance Transfer
After a balance transfer, the original credit card account’s credit limit is restored by the amount that was transferred out. This means the full credit line becomes available again for new purchases. The cardholder remains responsible for any remaining balance not included in the transfer and for any new charges made on that account. It is important to continue making at least minimum payments on the original card until confirmation that the transfer is fully processed.
Keeping the original account open can be beneficial for one’s credit profile. Clearing the balance on the original card without closing the account can improve the credit utilization ratio. A lower utilization ratio, recommended to be below 30%, is viewed positively by credit scoring models. Maintaining older accounts open contributes to a longer average credit history, which can favorably influence credit scores.
The New Account After a Balance Transfer
The credit card account to which the balance was transferred now holds the consolidated debt, under a promotional interest rate. This transferred amount will include the original debt plus any balance transfer fees. During the introductory period, payments applied to the transferred balance can go entirely towards reducing the principal. This promotional period spans from 12 to 21 months, providing a window to significantly reduce the debt without incurring interest charges.
It is important to understand the terms of the new account, including the duration of the promotional rate and the standard variable APR that applies once the introductory period ends. If any balance remains after the promotional period, it will begin accruing interest at this higher, regular rate. Using the new balance transfer card for new purchases during the promotional period can complicate repayment, as payments may be legally applied to the lower-interest balance first, potentially causing new purchases to accrue interest immediately.
Managing Accounts Post-Transfer
Effective management of both the original and new credit card accounts is important after a balance transfer. Cardholders should monitor statements for both accounts to track balances and confirm payment postings. Understanding the distinct payment due dates for each card helps in avoiding late fees and maintaining a positive payment history. Timely payments on all accounts are a factor in maintaining a healthy credit score.
To maximize the benefit of a balance transfer, it is advisable to avoid incurring new debt on the original card, especially if the goal is debt reduction. Before considering closing the original account, cardholders should weigh the potential impacts on their credit utilization ratio and the length of their credit history. Also, be aware of any annual fees associated with either card to avoid unexpected costs. Applying for multiple new credit cards in a short timeframe should be approached cautiously, as each application can result in a hard inquiry that may temporarily affect credit scores.