How Does A Balance Transfer Affect Your Credit Score?

The term balance transfer describes the process of moving debt from an existing credit cards or loan to an alternative credit card account. Many people open a new credit card and transfer balances to it, but you may be able to perform a balance transfer with a credit card you already hold.

Balance transfer offers frequently feature lower annual percentage rates (APRs) for a limited time—sometimes for six months, nine months, a year or longer. For example, a credit card company might offer balance transfers to new cardholders that feature 0% APR for 18 months. A credit card issuer you already do business with might offer you a chance to transfer balances at a special, limited-time rate.

When you take advantage of a 0% or low introductory APR balance transfer offer, you can potentially pay off your credit card more easily. Since interest is either on pause or reduced with many balance transfers, you may be able to reduce or pay off your principal balance more quickly.

A balance transfer won’t raise your credit score in and of itself. But it could bring about some changes to the overall makeup of your credit report that may benefit you. Below are two examples of how a balance transfer might lead to a higher credit score.

1. Lower Credit Utilization

Your credit utilization rate—the relationship between your credit card limits and balances—is an important factor when it comes to your credit score. If you open a new credit card account and transfer balances from other credit cards to it, one of the side effects could be a lower credit utilization rate.

For example, let’s assume you have two credit cards with the following balances and limits:

In the scenario above, your overall (or aggregate) credit utilization rate would be 50%. That’s the percentage of your available credit card limits that you’re using. If you’re interested in the math, here’s a look at the equation you can use to calculate credit utilization.

• $5,000 (Total Credit Card Balances) ÷ $10,000 (Total Credit Card Limits) = 0.50 x 100 = 50% Credit Utilization Rate

Now, imagine you apply for a third credit card with a 0% balance transfer offer. You qualify for a credit card with a $10,000 limit and transfer $5,000 worth of existing credit card debt to the new account.

Thanks to your new credit card account and balance transfer, your overall credit utilization rate would drop to 25%.

• $5,000 (Total Credit Card Balances) ÷ $20,000 (Total Credit Card Limits) = 0.25 x 100 = 25% Credit Utilization Rate

In general, a 25% utilization rate is much better for your credit scores than a 50% utilization. Plus, as you pay down your credit card balance, your credit utilization rate should drop even lower — as long as you don’t take on new debt. In this scenario, your credit score would have a good chance of improving thanks to your balance transfer.

2. Fewer Accounts With Balances

Another factor that influences your credit score is how many accounts with balances appear on your credit report. From a credit-scoring perspective, it’s better to have fewer accounts (even with balances) than too many.

Transferring balances from multiple credit cards or loans and combining them into a single account reduces the number of accounts with balances on your credit report. When this happens, there’s a chance your credit score might improve as a result.

If you use a balance transfer responsibly, it can be good for your credit score. However, there are certain situations where a balance transfer might lead to a lower credit score instead of a higher one. Below are three examples.

1. New Hard Credit Inquiry

If you apply for a new credit card with a balance transfer offer, the application itself might have a slight negative impact on your credit score. When a lender checks your credit report, something known as a hard credit inquiry takes place. A credit inquiry means someone has accessed your credit, and a “hard” inquiry has the potential to damage your credit score.

In the long term, credit inquiries tend to be far less significant than the other information on your credit report. So, when you’re deciding whether or not to apply for a new balance transfer credit card, keep the following details in mind.

• Credit inquiries are one factor that affects only 10% of your credit score.
• Not every hard inquiry triggers a credit score drop.
• After 12 months, hard inquiries no longer influence your credit score.

You want to be selective about when you apply for new credit. But as long as you don’t overdo it, you don’t have to be afraid of applying for financing, like balance transfer credit cards, when it can benefit you.

2. Length of Credit History Changes

Your length of credit history is another credit report category that makes up your credit score. With FICO scoring models, length of credit history determines 15% of your credit score.

Some of the factors that play a role here include:

• The age of your oldest account on your credit report
• The age of your newest account on your credit report
• The average age of all of the accounts on your credit report

Older accounts are ideal where your credit score is concerned. So, the addition of a new credit card to your credit report might trigger a small credit score drop.

Keep in mind, however, that your length of credit history is less influential over your credit score than other factors (like payment history and credit utilization). As long as you keep your credit utilization low and keep your payments on time, these more meaningful factors might offset any potential credit score drop that a decline in your age of credit might cause.

3. Problems Caused by More Debt

A balance transfer will only work in your favor if you handle the process responsibly. If you open a new credit card account, transfer your debt to it and then continue to take on new credit card debt each month, you could create serious financial problems. This type of behavior could also hurt your credit score.

Mounting credit card debt could make it difficult to keep up with your payments down the road. Late payments may cause major credit score damage. Credit card delinquency may also come with other consequences too, like late fees and even account closure.

If you continue to rack up credit card debt, your credit utilization level may start to creep upward again as well. Higher credit utilization ratios are never positive in terms of your credit score.

Balance transfers aren’t the right fit for everyone, no matter how attractive the offer. However, a balance transfer card might work for you under the following circumstances.

• You find a balance transfer offer that can save you money. The point of a balance transfer is to consolidate debt, save money, and pay down your high-interest debt. So, you’ll want to crunch the numbers, including balance transfer fees, to make sure that a balance transfer credit card offer makes good financial sense before you apply.
• You have a debt-elimination strategy. It’s critical to use balance transfers the right way. They should be tools to help you pay down debt, not a temptation to go further into the hole.
• Your credit rating is healthy enough to qualify for a new balance transfer credit card. Most card issuers require you to have good to excellent credit if you want to qualify for a new balance transfer credit card. However, some credit card companies have balance transfer offers for fair credit that may be worth reviewing.
• The balance transfer card you’re considering isn’t with the same bank. Most credit card issuers won’t let you move debt from an existing credit card to a new one from the same issuer. That said, some allow you to receive cash into your checking account, which you could then use to pay your bills as you see fit.

Related: The Pros And Cons Of Balance Transfer Credit Cards

If you’re struggling with credit card debt, but a balance transfer doesn’t seem like the right fit, you might want to look into credit counseling or even bankruptcy options. Either of these moves might have an impact on your credit score as well. But the worst thing you can do is ignore that you have a problem and default on your debt.

Related: How To Do A Balance Transfer In 8 Steps