A balance transfer can hurt your credit score by increasing your single-card utilization, lowering your length of credit history and adding a hard inquiry to your credit report. But it can also boost your score by increasing your overall card utilization, and it can help you pay off debt faster.
Eliminating credit card debt can be a monumental task. Juggling multiple credit card balances with high interest rates can make the process even more challenging.
With many balance transfer credit cards, you can tackle your principal balance without paying interest for a year or longer. Not only can a balance transfer save you money, but it can also make it possible to pay off your debt more quickly.
Getting a balance transfer card and moving your debt can hurt your credit score, however, even if only temporarily. Here’s how balance transfers can hurt your credit score and what to do to recover.
How a balance transfer can hurt your credit
How much you owe makes up 30% of your FICO credit score, making it the second-most influential factor behind your payment history. But while your total debt is considered, it’s not as important as your credit utilization ratio on your credit cards.
This ratio is determined by dividing your credit card balance by your credit limit, and it’s calculated for each card and across all of your credit card accounts. The latter carries more weight under FICO’s traditional credit scoring formula.
“Lenders don’t like to see when a high percentage of an individual’s available credit is used,” says Leslie Tayne, debt attorney and managing director of Tayne Law Group, “since the risk of overextending credit, as well as loan defaults, is higher when you’re using more of your available credit.”
Opening a new credit card will decrease your aggregate credit utilization, says Jim Wang, founder of the personal finance blog Wallet Hacks.
For example, if you have a $5,000 balance on a card with a $15,000 credit limit, your utilization rate is 33%. But if you open a new card with a $10,000 limit and move the balance over to the new card, you now have $25,000 in available credit, giving you a 20% utilization rate between the two cards.
That said, your single-card utilization rate in this scenario will jump from 33% to 50% when you transfer the balance, which could reflect negatively on your credit score. Credit experts generally recommend keeping your balance below 30% of your credit limit, but the lower you keep it, the better. So, while your credit score may drop in the beginning, having a plan to pay it down quickly can help your score rebound.
Virtually every time you apply for a new credit account, the lender will run a hard inquiry on one or more credit reports. According to FICO, each new hard inquiry will typically knock fewer than five points off your credit score. But they can have a greater impact if your credit history is relatively new, you have few credit accounts or you apply for multiple credit cards in a short period.
This means most people don’t need to worry about taking a hit to their credit score when opening a balance transfer credit card. But it’s a good idea to check your credit score before you apply to make sure you have good approval odds with the first card you choose. Most balance transfer cards require at least good credit, which translates to a credit score of 670 or higher.
Also, keep in mind that while hard inquiries stay on your credit reports for two years, they affect your FICO score only for half that time. So if opening a new account does hurt your credit score, it’ll be temporary.
“While you shouldn’t go crazy and apply for a ton of new credit at once, it’s fine to apply for a new balance transfer card or another form of financing when it benefits you,” says Michelle Black, credit expert and founder of CreditWriter.com. “After all, what’s the point of earning good credit scores if you can’t leverage them to your advantage once in a while?”
Average age of accounts
Your length of credit history makes up roughly 15% of your FICO credit score. While it’s not as important as your credit utilization and payment history, opening a new account can still cause your credit score to drop.
Your length of credit history takes three factors into consideration:
- The age of your oldest credit account, the age of your newest account and the average age of all your accounts
- How long certain credit accounts have been open
- How long it’s been since you’ve used your accounts
When you open a new balance transfer credit card, the first two factors come into play.
“If you are a relatively new borrower, a new line won’t impact you too much,” says Wang. “If you’ve had credit for quite some time, it will impact your average length of credit lines.”
For example, let’s say you have two credit accounts: a student loan you’ve had for five years and a credit card you’ve had for two years. Between the two, your average age of accounts is 3.5 years. If you open a balance transfer credit card, though, the average age drops to 2.33 years because the age of the new account is zero years.
Of course, it’s impossible to tell exactly how much such a decrease will affect your credit score, but it’s still important to know it can hurt it.
“You should consider it, but if you’re using a balance transfer to pay off debt,” says Wang, “that should play a bigger role in your decision making.”
How to do a balance transfer without hurting your credit
To do a balance transfer while keeping your credit intact, follow these simple guidelines:
- Apply only for the card that will best fit your needs. It’s difficult to know how high a credit limit an issuer will offer you if approved for a balance transfer card. But it’s best to avoid hedging your bets by applying for more than one balance transfer card at a time. While you can’t predict a card’s potential credit limit, you can compare balance transfer cards based on how long they offer 0% APRs and other factors.
- Avoid transferring a balance up to the new card’s full credit limit. If you transfer a balance that either maxes out your new card or gives it a really high utilization rate, that could hurt your credit score. A maxed-out card can lower your score by more than 100 points, according to myFICO.
- Wait until you’ve built up your credit history. If you already have a lengthy credit history – for example, several credit cards or loans aged about three years or older – a brand-new account may not have much of an effect on your score. But if you’re getting charged an inordinately high APR on an existing card’s balance, you may be better served by doing a balance transfer regardless of your credit history. (Note that if your credit file is too thin, you may not qualify for a balance transfer card.)
Is a balance transfer a good idea?
While a balance transfer credit card can save you money as you pay off credit card debt, you’ll need to be disciplined to make that happen. If you struggle to make more than the minimum payment or your financial situation suddenly worsens, you may not make much headway.
Also, it’s important to consider that many balance transfer credit cards offer rewards when you make new purchases and that sometimes includes a sign-up bonus to encourage immediate spending.
If you’re prone to overspending, the promise of rewards could tempt you to add more debt to your new card, increasing your credit utilization and making it more difficult to make your monthly payments.
What’s more, if you make purchases on your new card and don’t have a 0% APR promotion on purchases, interest may start accruing immediately and can neutralize any benefit you get from the balance transfer promotion.
As a result, it’s best to avoid adding new debt to your new balance transfer card and the original card until you’ve paid off what you owe. If you want to spend just enough to earn the card’s sign-up bonus to ease the cost of the card’s balance transfer fee, though, it can be worthwhile. But you can also get a card with no balance transfer fee to solve that problem.
“If you’re worried you won’t be able to avoid the temptation to overspend, a new balance transfer card might not be right for you,” says Black, “at least not until you establish a budget and get your spending under control.”
See related: How long does a balance transfer take?
How to build credit after a balance transfer
A balance transfer can hurt your credit score in many ways, but in every case, responsible credit card use can make it easy to recover over time. This means making at least the minimum payment on time, every time, and avoiding running up balances on any other credit cards you own.
Instead of focusing solely on how your credit score will react, consider how eliminating credit card debt will affect your overall financial health.
In most cases, taking a temporary hit to your credit score can be worth the long-term benefits of being debt-free.