Your score might experience a minor downtick, but there should be no long-term reduction in your score. There might be some factors that could cause your score to decline further, or to increase a bit, depending on the circumstances around the transfer.
What Is a Balance Transfer?
To understand the impact balance transfers have on your credit score, you first need to understand how balance transfers work and why they’re an effective way to pay down credit card debt.
Credit card companies will often try to entice customers into getting their credit card by offering a low-interest rate for a short period of time. This introductory rate might apply to both new purchases and balances you transfer from another card. The best credit card rates for balance transfers can be as low as zero, so savvy credit card users might move the outstanding balance from a higher-rate card to a new balance transfer credit card, which has a lower rate to save money on interest. You will probably have to a pay a fee, but that sum is usually less than what you’d typically pay in interest over time.
Do Balance Transfers Hurt Your Credit?
Balance transfers have a minimal impact on your credit score. It’s what happens before and after the transfer that can affect your credit score.
If you open a new credit card account to transfer your balance to, you will have what’s known as a “hard inquiry” on your credit report. This can cause your score to drop by a few points because it’s an indication that you’re looking to acquire more credit.
The point of a balance transfer is to pay less interest, so you can pay off your balance sooner. If you do this, preferably before the introductory balance transfer rate expires, your credit score will improve over the long term.
How Your Credit Score Is Calculated
Your credit history is the largest part of your credit score, representing 35 percent of your total score, which is simply your record of paying your creditors on time. If you’ve never had a late or missed payment, you should have a stellar credit history.
The second largest factor is your credit utilization ratio, which is the amount of credit you’re using compared with the amount of credit you have. If you are using every bit of credit you have, your credit utilization ratio will take a hit. If you have available credit that you’re not using, you’ll have a better ratio. Transferring your balance to a new credit account will improve your credit utilization ratio.
Here’s an example: Suppose you have a credit card that has a $10,000 limit. You have a balance of $4,000 on that card. Your credit utilization ratio is 40 percent — you’re using 40 percent of the credit that is available to you. You decide to open a new credit card account with a 0 percent introductory interest rate and transfer your balance to that card. The new card also has a $10,000 limit. Your credit utilization rate is now 20 percent because you have $20,000 of credit available but are only using $4,000. This improvement should have a positive impact on your score.
Other factors that affect your score include how long you’ve had your accounts (longer is better) and if there have been inquiries on your credit (fewer is better).
Watch Out for This Credit Score Killer
After a balance transfer, many people make a big mistake that can cause their score to drop significantly. That mistake is to run up a balance again on the card you transferred the balance from. If you don’t want your credit score to take a hit, make sure you don’t use that old, high-interest card. Don’t close the account either, because that will reduce your credit utilization rate, thus hurting your credit score.
Transferring a balance from a high-interest credit card to one with a lower rate can be a good way to manage credit card debt and could provide debt relief. Just make sure you pay off that balance as soon as you can and don’t add to it.