Q&A: How to combine existing card balances without hurting score

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Question

Dear Speaking of Credit
I have three credit cards through one company. If I combine them all into one, the one I’ve had the longest and that has the lowest interest rate, will that hurt my credit? – Harmony

Answer

Dear Harmony,
You certainly have the right idea, transferring your higher-interest balances onto the lower-interest card. Not only will you apply more of your monthly payments to principal and less on interest, but you will have to make one, not three, of them each month. Good move!

When combining card balances, typically using a balance transfer offer from your card company, your big credit scoring concerns should be over how the transfer affects the following factors:

  • Credit utilization calculations (balance/credit limit).
    Here credit usage is examined using the proportion of a card’s balance to its credit limit, both individually and for all cards combined. Lower utilization percentages lead to higher scores.
  • Average account age calculations (combined number of months since the open date for all credit accounts/number of accounts).
    This is one of the ways the scoring formula measures how long you’ve been using credit; the higher the average account age, the higher your score.

Credit utilization
Yours is a balance transfer situation in which no new account is being opened, nor are you adding to or taking away from your current card debt. When it comes to calculating your score, you’re simply moving money around.

Still, while your combined utilization may remain the same, expect to see some serious changes to those individual utilization percentages, as the card receiving the two balances sees its utilization rise, while the other two drop to 0 percent.

 

Video: What is your credit utilization ratio?

Since the total amount you owe will generally remain the same after the transfers, your credit score should not change more than a few points higher or lower than when there were three separate balances.

Open versus closed cards
When trying to boost your score, it’s important to understand that this reassuring prediction of little, if any, score change applies only when you leave all cards open after the transfers.

The lines of credit on the paid-off cards must remain open if the low percentages brought on by the now-$0 balances are to be included in your combined utilization. Were you to close them, your total balance would make up a higher portion of your available credit, leading to a lower score.

Average account age
Contrary to popular belief, closing a card won’t exclude its positive history from your credit report or the credit-scoring calculations that measure the age of your credit accounts. Yet there can be a future as well as a present downside to closing cards.

While open cards can remain on your credit report forever, a closed card will usually be removed after 10 years. The impact to your score at that time will be as if all of the positive credit history associated with that card over many years simply never happened.

Perhaps the worst scoring impacts felt from the loss of an old account in good standing occur within the length of credit history scoring category, which contributes about 15 percent of your score points. The three major sets of score factors measuring the length of your credit track record are:

  • Average account age.
  • Age of oldest account.
  • Age of newest account.

With all such factors, longer lengths of time are always better for your score. So you’ll want to avoid reducing them due to:

  • Closed accounts, that are likely to lower average account age and possibly reduce the age of your oldest account.
  • New accounts, that can also lower the average account age as well as the age of the newest account.

In other words, just don’t close (or open) any cards. But this doesn’t mean do nothing. In order to hang onto those open cards for as long as possible, you’ll want to prevent the card issuers from closing them due to extended inactivity.

Therefore, use all open cards every few months or so – paying within the grace period to avoid interest – to keep them contributing positively and indefinitely to your score.

See related: Combining cards: Rolling 2 credit limits into 1 card, How does a balance transfer affect your credit score?

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Updated: 11-18-2017