How Does a Balance Transfer Affect Your Credit Score?
Know the Pros and Cons of Moving Your Balance
A credit card balance transfer can be an enticing offer if you're weighed down by a large, high-interest balance. Almost every major credit card issuer offers balance transfer promotions that will allow you to pay no interest on your balance for at least six months or give you other rewards.
Before you jump on one of these deals, though, you should carefully count the costs. Balance transfers can affect your credit score—so make sure you know what you're getting into.
How Your Credit Score Is Calculated
Transferring balances can have an impact on your credit score. There are five factors that affect your credit score, three of which are particularly relevent when it comes to balance transfers:
- Payment history
- Level of debt
- Age of credit
- Mix of credit
- Recent credit applications
How Balance Transfers Can Hurt Your Credit Score
Credit card balance transfers can affect your credit score in the areas of level of debt, age of credit, and recent credit applications. This can result in a temporary lowering of your score.
Balance Transfers and Credit Utilization
Your credit score considers your credit card balances in relation to their respective credit limits—this ratio is known as your credit utilization—and your total credit card balances compared to your aggregate or total credit limit. This accounts for 30% of your credit score. The higher your credit utilization, meaning the higher your balances are compared to their credit limit, the lower your credit score will be.
If you transfer a balance to a credit card with a lower credit limit than the previous card, your credit utilization percentage for that card will go up and you could lose credit score points. Fortunately, you can regain lost credit score points by paying down your balance quickly. Ideally, your credit card balances should be below 30% of the credit limit.
Transfers Lower the Credit Age
Age of credit measures how long you've been using credit and accounts for 15% of your credit score. This part of the credit scoring calculation averages the length of your credit accounts and the age of your oldest account. Adding a brand new card into your credit mix will automatically bring down the average age of your credit.
Transferring your credit card balance to an account that's already open won't damage your credit score in terms of credit age. However, if you open a new credit card, your average age of credit will decrease.
Hard Inquiries Automatically Ding Your Credit
You probably know that each credit inquiry makes a small dent in your credit score. Since recent credit applications—along with new cards you've actually opened—make up 10% of your credit score, applying for a balance transfer credit card could cause your credit score to drop.
Only the application affects your credit score, not the approved or denied outcome, but opening several cards in a short period will bring your credit down.
FICO, developers of the widely-used credit score, says that inquiries typically only hurt a credit score five points or less depending on the other information in your credit report. The other good thing is that only inquiries from the past 12 months will affect your credit score.
How a Balance Transfer Can Help Your Credit
Although your credit score might take a hit when you transfer your balance, that doesn't necessarily mean it's a bad move. There a few ways it may ultimately improve your credit in the long term.
More Accounts Can Lower Your Utilization
Although you might have a higher credit utilization ratio on your new card, your overall utilization rate will go down if you don't use your cards more than you have been. Since your overall utilization rate is one of the major factors that affects your score, this could bring down your score after a while.
Don't purchase more on credit simply because you have more cards. It's important to charge only what you can afford to pay off—and to keep your utilization rate low.
You Might Pay Off Your Balance Faster
The primary motive for transferring a balance is often to reduce the amount of interest that you're paying. If you are carrying a $5,000 on a credit card with a 20% APR, for instance, you'll pay $511 in interest to pay off the balance over 12 months. If you transfer that balance to a 12-month, zero-interest card, you can apply that extra $511 toward paying off the balance faster.
Paying off your balance more quickly means you'll be using less of your credit, which will ultimately help your score. Keep in mind, though, you may have to pay a balance transfer fee, which would chip away at your savings in interest.
The Bottom Line
While transferring a balance could impact your credit score, you can regain any lost points by paying on time, reducing your balance with regular above-minimum payments, and waiting before making any new credit card applications.
Don't rule out a balance transfer because of the potential impact on your credit score. Weigh the cost of the balance transfer vs. the cost of not doing one to help you make the best decision.