Balance transfers can improve your credit utilisation if they move debt from one or more cards onto a new card with a higher limit, because your total revolving debt is spread across more available credit. But the effect is not always straightforward for consumers: applying for a balance transfer can add a credit enquiry, and maxing out cards afterwards can undo the benefit.
How It Works
A credit utilisation ratio is the amount of revolving credit you are using compared with your total available credit. In simple terms, if you owe less relative to your limits, your utilisation is lower, which is generally viewed more favourably by lenders.
A balance transfer may reduce utilisation in two common ways. First, if you open a new card with a transfer offer, your overall available credit often increases. Second, once the transferred balance leaves the old card, that account may show a lower or zero balance, which can improve your overall utilisation ratio.
However, there is a catch. If you later close the old card, your total available credit can fall, and your utilisation ratio may rise again even if your debt amount has not changed. That means the timing of account closures matters just as much as the transfer itself.
What Consumers Should Know
The Australian Securities and Investments Commission (ASIC) has noted that balance transfers are widely used, with balance transfers onto 7.6% of open credit card accounts in June 2017, and that many consumers do reduce debt after transferring balances. ASIC also found that a substantial minority may fall into a “debt trap” if they do not repay consistently during the promotional period.
MoneySmart explains that balance transfer deals usually run for a limited time, often 6 to 24 months, and may require monthly minimum repayments to keep the promotional rate. It also warns that new purchases on the card can attract a different, usually higher, purchase rate and may reduce the benefit of the transfer.
Canstar notes that multiple credit applications in a short period can hurt your credit rating, and missed repayments can also have a negative impact. So, while a balance transfer can help utilisation, the application itself and your repayment behaviour both matter.
A Simple Example
Imagine you have two credit cards with a combined limit of $10,000 and balances totalling $6,000. Your utilisation is 60%. If you transfer that $6,000 to a new card with a $10,000 limit and leave the old cards open, your new total available would rise to $20,000, while your debt stays at $6,000. Your utilisation would then fall to 30%.
Best Practices
- Compare the transfer fee against the interest you are likely to save. MoneySmart advises checking whether the savings outweigh fees and conditions.
- Keep repayments on time, because missed repayments can damage your credit profile.
- Avoid using the new card for fresh spending unless you understand how purchase interest will apply.
- Think carefully before closing old cards, since doing so can reduce available credit and lift utilisation again.
- Apply only when needed, because several applications in a short time negatively impact your score and can be viewed negatively by lenders.
