Today, a housing loan is one of the easiest ways to fund the purchase of a property. However, it is a big financial commitment that goes on for years. With people already facing tough financial situations after COVID, even a small reduction in the EMIs can be a welcome relief for most. Thus, if you are repaying a loan at a high rate of interest, the home loan balance transfer facility can help you save money by transferring your loan to a lender offering a lower interest rate. But does a home loan balance transfer to a new lender affect your credit score? Read on to know the answer as well as other things you must know about home loan balance transfer.
Can a Home Loan Balance Transfer Boost Your Credit Score?
A loan balance transfer does not affect your credit score itself. It, however, may help to bring about changes in your credit report that may lead to a higher credit score. Here are some ways that show how a home loan balance transfer may affect your credit score positively.
Decreased Credit Utilization
Normally credit utilization helps make up 30% of the credit score of an individual. The credit utilization ratio is expressed as a percentage of how much you owe divided by the total credit available to you. The lower the ratio, the better. When you do a balance transfer, a credit limit is added to your total credit available. Further, while doing a home loan balance transfer, one can also opt to go for an extended loan tenor or a housing loan tenor. Having more credit available compared to what you are using now lowers your credit utilization and improves your credit score.
Improves Payment History
If you have a housing loan, using a housing loan EMI calculator you can know your monthly EMI details easily. However, with other loans running, transferring multiple loan accounts to a single header will make it easier to keep a track of all of them. This will make budgeting easier for you as single monthly payments of dues are easier to manage than managing several payments separately and remembering each EMI and payment date separately. On-time payments account for nearly one-third of your credit score, so avoid late payments as this can help to strengthen your credit score. When you opt for a home loan balance transfer, you also essentially bring down your EMIs, making them more affordable and easier to repay. So, by doing a loan balance transfer, one can improve their payment history and thus enhance their credit score.
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How Can a Home Loan Balance Transfer Hurt Your Credit Score?
Sometimes, however, a balance transfer of a loan may not be the right decision and may hurt your credit score. Here are some reasons why.
Leads to a Hard Inquiry
To transfer the loan balance, one must apply for a new loan. This leads to the lender conducting a hard credit inquiry on your credit report. Each such hard credit inquiry lowers your credit score by a few points. Most times you need not worry about how credit inquiries affect your credit score. But for borrowers whose credit scores lie in between average credit and good credit, it might impact your credit score negatively on each such hard inquiry.
Increasing Credit Utilization Ratio
Your credit utilization ratio is the ratio that shows the relation between your current debt and the available credit limit and is an important part of your credit score. It is always a good practice to keep your credit utilization ratio low and below 30%. However, when you transfer multiple loan balances to a single card and at the same time, use the credit limit freed from the other cards, your credit utilization goes up and this lowers your credit score.
Shortening Your Credit History
The length of credit history also plays an important role in your credit score. When a balance transfer is done, one may close an old credit card after transferring the balance. This may lead to the loss of some of the credit history you have built up over the years. This loss of past credit history could lower your credit score. So, it is always best to not close old credit accounts completely as it deletes your old credit history leading to a lower credit score.
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So, a home loan balance transfer can not only help the borrower to stretch the loan repayment tenor over a long period for comfortable repayment but also avail housing loan tax benefits on the loan and top-up loan if availed, which can help to save funds that can be invested for future use. As already discussed, it might also indirectly affect your credit score. Thus, if you are a borrower who has a long repayment tenor pending and wants to make a good credit score, then a home loan balance transfer may be a good option for you and help you save funds for a rainy day.