A balance transfer can hurt your credit score by lowering your length of credit history and adding a hard inquiry to your credit report. But it can also boost your score by helping you pay off debt faster.
Eliminating credit card debt can be a monumental task. And 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, it can also make it possible to pay off your debt more quickly.
How a balance transfer can hurt your credit
Virtually every time you apply for a new credit account, the lender will run a hard inquiry on one or more of your credit reports. According to myFICO, each new hard inquiry will typically knock fewer than five points off your credit score. But hard inquiries 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.
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.
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 by lowering the average age of your accounts.
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.
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.
How to do a balance transfer without hurting your credit
To do a balance transfer and keep 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 you’re approved for a balance transfer card. While you can’t predict a card’s potential credit limit, you can compare balance transfer cards based on how long they offer 0 percent 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 already or your financial situation suddenly worsens, you may not make much headway.
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, however, 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 percent APR promotion on them, 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 intend to spend just enough to earn the card’s sign-up bonus and offset 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.
It’s best to get a new balance transfer card if you’ve already established a budget, and you have your spending under control.
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.
Now you know how a balance transfer can affect your credit. But 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.