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.
But getting a balance transfer card and moving your debt can hurt your credit score, even if only temporarily. Here’s how balance transfers can lower your score and what you can do to recover.
How a balance transfer can hurt your credit
Though performing a balance transfer in itself is not detrimental to your credit score, applying for a new balance transfer card will affect your score. 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 percent 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 a credit inquiry 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. (Although, 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, it can be worthwhile.)
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. Cardholders who have a relatively small debt and their spending under control are the best candidates for balance transfer cards.
When comparing offers, look for one that fits your financial situation and has a plan that makes sense for you.
Pay attention to the length of intro APR, and be sure the intro period is reasonably long enough for you to pay off your transferred balance. (To see how long your debt will take, check out our payoff calculator.) Also, look into cards that waive the balance transfer fee. Some cards offer no balance transfer fee, or at least a lower fee, during the intro period.
Additionally, review the terms and conditions of your balance transfer offer. Some cards may end your zero interest period early if you miss a payment. Others require you to complete the balance transfer within a set time frame (such as 90 days) in order for the 0 percent APR to apply.
How to build credit after a balance transfer
The best thing for your credit score after you’ve performed a balance transfer is to focus all your funds on paying off your debt. Aim to pay more than the minimum payment on time, every month. Any time you reduce your debt, you’ll be taking a step toward improving your credit score. In every case, responsible credit card use can make it easy to recover over time.
Try to avoid running up balances on any other credit cards you own and adding new debt to your new balance transfer card and the original card until you’ve paid off what you owe. Some balance transfer cards don’t have a 0 percent APR promotion on new purchases, so interest may start to accrue and can quickly neutralize any benefit you get from the balance transfer promotion.
Be sure to create a budget, honestly factoring in your expenses, as well as payments for your transferred balance. If you find yourself struggling to make payments on the new balance transfer card, you could always revisit your budget and determine if you need to make any changes.
After the balance transfer is complete, and assuming you were able to pay it off entirely, you’ll need to decide what to do with your old card. You may want to keep it in order to maintain a low credit utilization ratio. After all, canceling a credit card reduces your overall available credit, which could hurt your score by increasing your credit utilization. However, if you think keeping the card will tempt you into spending more, or if it has an annual fee you no longer want to pay, closing it is probably best.
If you decide to keep the card open, consider putting a small recurring payment on the account, such as a membership or streaming service, to keep it active — and then put the card away in a drawer to avoid running up a new balance.
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.