The Credit Guy

Balance transfers impact your credit score


The ratio between how much credit you have available and how much credit is used is calculated as part of the amounts-owed category when calculating your credit score.

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Question for the expert

Dear Credit Guy,
I just transferred a balance from one existing card to another existing card and now I am going to pay the whole amount off that I just transferred. Is this going to cause a problem with my credit score? — Candace

Answer for the expert

Dear Candace,
Congratulations on being on the path to living debt free! Being able to pay off your credit card balance is a great feeling. Once you pay off the card to which you transferred the balance, your credit score should increase. About 30 percent of your FICO score is based on the amounts that you owe. Generally speaking, the less you owe, the higher the points in this category.

In addition, the ratio between how much credit you have available and how much credit is used is also calculated as part of the amounts-owed category when calculating your credit score. The higher the ratio, the lower your points in this category. Paying off the balance will increase your score because you will be decreasing the ratio.

For example, let’s say you used a balance transfer credit card and transferred a balance of $2,500 to a credit card with a credit limit of $5,000. The ratio of credit available to credit used on this account would be 50 percent. Credit scores are highest when the ratio is lower than 25 percent. However, not just this one account is factored into your credit available versus credit used ratio. All of your accounts are included.

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If you have, for example, four credit cards with a total credit limit of $20,000 and pay off the card with the balance of $2,500 with a $5,000 limit, your other three cards would still be considered when calculating the available-to-used ratio. Your credit score may not change much if after you pay off the transferred balance your total ratio is still above 25 percent when considering all your accounts.

Your credit score may see a decrease if after you transfer the balance you close the account that no longer has a balance. The reason for this is because 15 percent of your score is based on the length of your credit history. Depending on how long the account that you might consider closing has been open, you could be shortening the length of your total credit history and, therefore, decrease your score. If the account is one of your oldest established accounts, I recommend that you keep the account open, but not that you make use of the available credit!

The only other way I believe that your credit might be affected by this move is if you are planning to seek additional credit in the near future. Some lenders get leery if you have too much available credit in the form of credit card accounts with high credit limits. If you are in the market for a mortgage or car loan and have a significant amount of credit available to you, you could consider asking the creditors to decrease your limits.

Take care of your credit!

See related: Understanding how credit scores work

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