Expert Q&A

How credit card balance transfers affect your credit score

To Her Credit columnist Sally Herigstad

Sally Herigstad is a certified public accountant and the author of “Help! I Can’t Pay My Bills: Surviving a Financial Crisis” (St. Martin’s Press, 2006). She writes “To Her Credit,” a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert

Dear To Her Credit,
When I see all these low interest rates out there, I wonder why I’m still paying 18 percent interest on my credit card. It seems like I could just get an introductory rate card, and then move to a different one when the rate goes up. Can I do that? Would it hurt my credit score? — Connie

Answer for the expert

Dear Connie,
Yes, you can do that. In fact, some people do. It may ding your score in the short term, but moving from one low interest credit card to the next could actually help your long-term picture — if you do it right.

First, the bad news: Opening even one new account will cause an immediate drop in your score. For example, when I got a new card recently, my score dropped seven points.

An evaluation of your new accounts makes up about 10 percent of your score, according to FICO, the creator of the most widely used credit score. Your score is impacted by new accounts because the scoring formula considers that people opening new accounts may soon take on more debt, which increases lenders’ risk.

The good news: Opening a new card usually causes only a minimal drop in your score, and the effect is short-lived. If you make payments on time and don’t max out your available credit, your score soon climbs back up.

What would happen if you jumped to a new low rate card every six months? You’re hurting yourself in one area, but helping in a couple others. In fact, if the new account has a higher limit, it could improve your limit-to-balance ratio — which is more important to the FICO formula than than new-account activity. In that case, the net effect on your score could be positive.

For example, let’s say you get a new balance transfer credit card. Then you transfer a $10,000 balance from a card with a $10,000 limit to the new card with a low rate and a $20,000 limit. You might lose a handful of points for opening the new account. But since your utilization (limit-to-balance ratio) accounts for 30 percent of your score and opening new accounts only affects 10 percent of your score, you could be much better off.

Before you try to jump to a card with a low interest rate, consider the following:

  • Don’t let the debt pile up.
    If you get new cards and then run up balances on both the old cards and the new ones, your long-term financial picture and your score will suffer.
  • Watch out for hefty transfer fees.
    You have to save a lot on interest payments, for example, to make it worth the typical 3 percent all-at-once transfer fee. Use our balance transfer calculator to compare offers.
  • Don’t apply for new cards when you want your score to look the best.
    A small temporary ding usually doesn’t affect anything — but you want to avoid it if you’re qualifying for mortgage right away. It’s not exact, but FICO says you can typically recover in six months whatever points you lost.

What about having too many cards? There’s no single measure of how many cards you should have. Your score is determined by your overall credit profile. The number of cards you have is not a heavily weighted factor. Don’t worry much about having too many cards. It’s more important you keep your balances low and never miss a payment. If your biggest worry is that you have too many cards, you probably have a very high score.

Remember, your goal should be to reach the point where you don’t carry a dime over on your cards from month to month. Credit cards are purchasing tools; they are not good long-term loans. When you get your balances down to zero, you’ll never worry about credit card interest rates again.

See related:  2014 balance transfer survey: Beware combo deals, two-tier fees

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