What Happens to Your Credit Score When You Transfer a Balance?
If you want to pay off your credit card debt faster, you might transfer your balance to a low-interest (or better yet, zero-interest) credit card. It’s not a move you want to make lightly, but it can be a useful hack. And surprisingly, it might actually boost your credit score.
How a Balance Transfer Works
With a balance transfer, you take the balance you carry on a high-interest credit card and move it to a card with a lower interest rate. Some cards even offer 0% introductory interest for balance transfers. This way, you can save money on interest and pay off your principal amount faster.
You have to be super careful with this hack, though. It should go without saying, really, but make sure you read the fine print: many cards will charge you a balance transfer fee. Others come with a 0% interest promotional period for six months or so, then charge you sky-high interest (like, 30%) after that period. So if you don’t pay off your balance in full at that time, you could pay even more interest than you would have in the first place.
How a Balance Transfer Affects Your Credit
Surprisingly, though, a balance transfer can actually improve your credit score. As Credit.com’s Abby Hayes points out, this is thanks to something called a credit utilization ratio.
Your credit utilization ratio is the amount of credit you have available to you versus the amount you actually use. So if you have one credit card with a $10,000 limit, and your balance is $1,000, that means your credit utilization is about 10%. That’s not bad—most experts recommend keeping your total credit utilization under 30% to keep your credit score intact.
Basically, though, the more available, unused credit you have, the better. Assuming you keep your old card open (and don’t rack up more debt), if you open another card to transfer your balance, this could be a good thing because it means more available credit.
If you’re approved for a new credit card with a balance transfer offer, you’ll wind up with a higher overall credit limit. This could be a good thing, since it will push your debt-to-credit ratio lower.
In the above example, if you’re approved for a new card with a $1,000 limit, your total credit limit will be $3,000. As long as you don’t accrue more debt, your total debt-to-credit ratio will be about 33%. Since that’s better than 50%, your credit score should be fine. Plus, with a lower interest rate, you can presumably pay off the debt quicker.
Even better, when you pay off your debt, your score will improve even more because you’re using even less available credit. However, it’s also worth noting that opening a new line of credit can ding your score, too. This hit typically doesn’t last very long, but it’s usually not a good idea to open new credit card when you’re applying for a mortgage or other loan.
If you’re thinking about a balance transfer, you can research card terms on sites like Credit.com, NerdWallet or Bankrate. They can be totally worth it, just make sure you follow the rules and transfer responsibly.
Can a balance transfer on your credit card hurt your credit score?
Credit card companies often entice you with fantastic offers on balance transfers. If you are paying a high rate on interest on your credit card it is likely that you have considered these offers in the past are may even be in the process of considering balance transfer credit cards. But did you think what impact a balance transfer on your credit card would have on your credit score? Probably not. Here we are to take you through the details. The long and short of it is that a balance transfer does impact your credit score negatively in the short term. But with some smart moves you can minimise the negative impact of the same. Here’s how:
What happens when you transfer your credit card balance
So, you think you have a great offer on a balance transfer credit card issuer and go ahead and make a credit card application. The first thing that happens when you apply for credit card is that the new card issuer requests CIBIL for your CIBIL score and CIBIL report. Now, every time a lender makes such a request to a credit bureau, it gets recorded as a hard inquiry on your CIBIL report. Each hard inquiry brings your CIBIL score down by a bit. Thus, your CIBIL score comes down when you make an application for a new card to make a balance transfer. However, this should not be much of a concern as this is a temporary effect and your score comes up gradually.
Be mindful of your credit utilisation
If you know how to boost your credit score, you are already aware that an important factor that influences your credit score is the credit utilisation or the amount of credit you use as against the total credit made available to you. When you make a credit card application for a balance transfer make sure that you apply for a card with a higher credit limit than your current credit card. If your new card has a lower credit limit than the one you hold at present, your credit utilisation will go up. This in effect will bring down your CIBIL score. Ideally, to improve your credit score, your credit utilisation should not exceed 30%.
What you should consider while making a balance transfer
The factors you should consider while making a balance transfer are as follows:
- The interest rate that you pay on your new credit card should be lower than the previous one. Unless the difference in rate exceed 1%-2%, it is not very prudent to consider a balance transfer on account of interest rates.
- While credit card issuers may entice you with fantastic offers on balance transfers that may seem lucrative from a distance, what they don’t tell you upfront is the one time charges that you will need to pay the new credit card issuer for carrying out this transaction. This amount varies from bank to bank and is fixed purely on the lender’s discretion. This amount can be as high 1-3% of your total outstanding amount.
- If your attempt is to consolidate your debt using the balance transfer method, you are better off considering other options such as an easy personal loan, rather than a balance transfer. Not only will it will make it easier to make your repayment schedule easier, a personal loan will work out to be cheaper (by way of interest rates) in the long run. However, if you are a conscientious user of credit you will not have arrived at the situation at the first place!
There is more to a balance transfer than your credit score
As we have established, there is indeed a negative impact on your credit score when you choose a balance transfer credit card, but that having said, there is no need to write off balance transfers altogether. Here are the following ways in which a balance transfer can help you:
- By maintaining good credit discipline (making timely repayments and keeping credit utilisation under control) you can increase credit score and redeem your financial reputation.
- You can make a habit of making mid cycle payments more than once within the billing cycle to further improve CIBIL score.
- Lastly, and obviously, by choosing the right card for balance transfer you can save thousands of rupees you pay as interest.
In conclusion, it is fair to say that a balance transfer does come with its own set of merits and should not be dismissed because of the potential impact on your credit score. On the contrary, it can save you thousands of rupees you pay as interest. However, when choose a credit card for balance transfer carry out extensive research before you apply for credit card so that you can gain significantly in the long run.
What Is A Balance Transfer: How It Works, Credit Score Impact, Fees & More
A balance transfer is when you repay existing debt with a new credit card. This moves, or transfers, your balance to the new card but does not reduce the amount you owe. Instead, the point of a balance transfer is to get a lower interest rate, save money on finance charges and pay off what you owe much faster. In fact, the average household – which owes more than $8,000 to creditors – could save well over $1,000 with one of the best 0% balance transfer credit cards.
All major credit card companies allow you to transfer credit card debt to a new credit card account. Certain issuers also allow you to transfer balances from auto loans, student loans, small business loans, payday loans, HELOCs, and mortgages.
But a balance transfer isn’t always a good idea. You generally need good or excellent credit to get a 0% balance transfer APR. Many cards have pricey balance transfer fees. And most have very high regular APRs. So if you transfer your balance to the wrong card or don’t pay it off soon enough, it could end up costing you.
To determine whether a balance transfer is right for you, you first need to understand how the process works, what costs are involved and how it may affect your credit standing. We’ll discuss those issues and more below.
How Do Balance Transfers Work?
When you transfer a balance to a credit card, that card’s issuer pays off your debt with the original lender, which could be another credit card company or lender. This satisfies your original agreement and shifts your payment obligation to the new card’s issuer. The original lender cannot prevent you from transferring away a balance, as all they see is a payment being made on your behalf.
You can request a balance transfer when you apply for a new credit card or at a later date. But sooner usually is better. Many credit card companies offer reduced interest rates and fees on balances transferred within a couple months of account opening.
Here’s what you’ll need to do a balance transfer:
- The account number for your existing balance;
- The dollar amount you wish to transfer;
- Standard credit card application information, including your name, Social Security number, employment information and income.
After you transfer a balance to a credit card, you will be responsible for paying at least the minimum amount required by the issuer each month. This amount will be listed on your monthly bill. Paying that by the due date will keep your account in good standing and allow you to keep any 0% intro APR your card may offer. But you’ll need to pay more than the monthly minimum at some point because cards with low intro balance transfer rates typically have pretty high regular APRs. So if you carry much of a balance beyond the low-rate intro period, it won’t take long for any money you’ve saved to turn into extra costs.
Types of Balances Transferable to a Credit Card
The types of balances that you can transfer to a credit card depend on which bank you get your card from. The graphic below illustrates the policies for the 10 largest credit card issuers in the United States.
What Is a Balance Transfer Fee?
The average credit card balance transfer fee is 2.62% of the amount you transfer. But some credit cards charge as much as 5%. A transfer fee helps cover both the cost of processing the transaction and the risk that comes with assuming your debt. That’s because the issuer of the card you’re transferring your balance to charges this fee, not the lender you’re transferring your balance from.
There usually are a fair number of credit cards with no balance transfer fee. But most don’t offer a 0% balance transfer APR. Every so often, however, a free balance transfer credit card comes along. Such cards charge neither a transfer fee, nor interest for the first few months and typically are available only to people with good or excellent credit.
Getting a 0% balance transfer credit card with no balance transfer fee is the only way to entirely avoid paying finance charges on transferred debt. But you can always minimize what you pay for a balance transfer by comparing offers in terms of their total cost: transfer fee, annual fee, and total interest expected based on your payoff timeline. A credit card calculator will prove extremely helpful in this regard.
Calculating the total cost of a balance transfer is critical because so many different factors affect whether this type of transaction is worth doing. And it’s easy to overlook even the most important ones. Clearly, balance transfer fees can prove quite expensive, having potential to offset savings from a lower interest rate. But people often fail to appreciate their significance before the fact. That’s largely the balance transfer fee is one of the least clearly represented account terms on credit card applications. So make sure to have your eyes peeled.
Balance Transfer Rewards
In theory, a balance transfer represents a great opportunity to earn rewards. Credit card companies offer rewards on every dollar you spend, after all. And transferring a balance means drawing down your credit line to pay off an existing debt obligation. That’s usually a high-dollar-value transaction.
Unfortunately, most credit card companies specifically exclude balance transfers from rewards earning eligibility. Not all of them have such policies, though. As of 2018, Barclays is the only one of the 15 largest credit card issuers that allows you to earn rewards on transferred debt with some of their cards
You can see whether a given card offers balance transfer rewards by reading the fine print of the card agreement. Keep in mind, however, that just because a balance transfer card offers rewards doesn’t mean it’s a good deal. It just means you need to factor the value of the rewards into your calculations.
Do Balance Transfers Hurt Your Credit?
A balance transfer does not affect your credit standing directly. Balance transfers aren’t recorded on credit reports, and credit-scoring companies don’t factor them into their models. But a balance transfer can lead to changes in your financial profile that will affect your credit score.
Here’s how a balance transfer could impact your credit:
- Credit Utilization: A balance transfer can alter your credit utilization ratio – a key component of the Amounts Owed portion of your credit score. Credit scoring companies calculate utilization for each of your credit lines individually as well as for all of them combined.As long as you don’t close the account you’re transferring your balance from, your overall utilization will fall. Your new account’s individual utilization will depend on the limit you receive.
- Overspending: Balance transfers can hurt you in the long run if you use them to support bad spending habits. Prior to the Great Recession, it was common for consumers to hop from 0% credit card to 0% credit card, only making minimum payments yet still avoiding interest on growing debts. But you’ll have to pay for what you charge at some point, and risky spenders found that out the hard way when 0% offers dried up during the credit crunch. Many were unable to pay off the balances they had amassed, especially given the added pressure of expensive finance charges. And they wound up missing payments, even defaulting on their obligations, and ruining their credit in the process.
- New Credit: Each time you open a new credit card account, your credit score takes a temporary dip that can last 3-6 months. Unless you have a major financial event in the near future – such as applying for a mortgage – this should not be a concern.
Balance Transfer Tips
- Check Your Credit Score: 0% balance transfer credit cards typically require good or excellent credit for approval. So it’s a good idea to see where you stand before picking a card and applying.
- Decide How Much to Transfer: A balance transfer doesn’t have to be for the full amount you owe. Partial transfers are not only acceptable, they’re actually wise. They allow you to take advantage of a card’s 0% intro period without worrying about how regular rates will affect the portion of your balance that you cannot pay off during the intro term.
To determine the proper transfer amount, start by identifying the monthly payments that you can comfortably afford to make. Then multiply that figure by the number of months you’ll have a low introductory interest rate.
- Make a Payoff Plan: Balance transfer credit cards must be used strategically, or not at all. That means you should only get one for a specific purpose and with an exit strategy in mind. A credit card payoff calculator can tell you what monthly payments you’ll need to make to be debt free by the time regular rates kick in, or how much you’ll save with a predetermined payment in mind.
- Don’t Assume 0% Rates Will Always be Available: As mentioned above, the availability of 0% balance transfer credit cards isn’t a given. You should therefore approach each balance transfer that you make as if you’ll have no choice but to pay regular rates at the conclusion of the introductory period.If you are able to transfer another balance down the road, great. But banking on it is a recipe for a less robust bank account.
- Understand the Various Ways One Can Leverage Balance Transfers: A balance transfer credit card’s most obvious value is as a debt management tool. The right card can help you save on interest and thus escape debt at the lowest possible cost. That’s the case whether you’re leveraging a balance transfer to pay off a lone revolving balance or as a means of debt consolidation.Interestingly enough, you can also use a balance transfer as a savings mechanism. If your bank account’s interest rate is high enough, leaving the majority of your would-be monthly credit card payments in the bank during a balance transfer credit card’s interest-free introductory period can be worthwhile. But this strategy is only advisable if it doesn’t become an excuse to spend more than you otherwise would.
- Carefully Compare Offers: There are usually lots of different balance transfer credit cards available. Getting the best deal requires figuring out which ones you’re eligible for, then comparing the total savings available with each. Balance transfer savings depend on a card’s interest rates, fees, and introductory period (if applicable).Consumers too often home in on one particular aspect of a balance transfer offer – typically the length of its 0% term. But it’s important to consider the overall impact of all potential costs.
- Keep Your Original Account Open: Even if you aren’t going to continue using the account from which you transfer a balance, you should still keep it open. This will prevent your overall credit utilization ratio from changing for the worse. Just make sure your card does not charge an annual fee.
- Don’t Use a Transfer as an Excuse to Overspend: Thinking, “I’m not getting charged interest, so it doesn’t really matter how much I spend,” is the worst mindset you can have when it comes to a balance transfer. You’re going to have to pay up at some point, so make sure to use a balance transfer credit card in accordance with a well-thought-out budget.Otherwise, any savings you score will quickly be erased by finance charges when regular rates take effect. You may even incur significant credit score damage if you can’t foot the bill.
- Don’t Make New Purchases with Your Balance Transfer Card: Anytime you carry a credit card balance from month to month, there is no grace period for purchases. That means any purchase you make will begin accruing interest immediately, unless your card has a 0% purchase APR. So it’s best to use a rewards credit card for spending.
How does a balance transfer affect my credit score?
Learn how a balance transfer can affect your credit rating and what you can do to ensure it has a positive impact on your credit score.
Opening a balance transfer card may affect your credit in some good ways and in some bad ways. Your credit score — also known as your FICO score — changes based on a mix of factors, and getting a new balance transfer card will tweak them a bit.
Here we’ve unpacked how a balance transfer can affect your credit history and the easy steps you can follow to ensure it has a positive impact on your credit score.
How can a balance transfer affect my credit rating?
Your credit file contains details of your entire credit history. It contains records of the type of credit you’ve been approved or rejected for, your payment history, inquiries for credit, the age of your accounts and credit usage, each of which have an impact on your overall credit score. You can expect lenders to go through your credit file each time you apply for a new credit card.
Here are some of the ways a balance transfer could affect your credit rating:
- Average account age. You might see a slight drop in your credit score when you apply for the card. That’s because opening a new account lowers what is known as your average account age. Lenders look at this metric because they want to see you’ve had a relationship with your credit card for a long time. This drop usually amounts to a small 5–20 points, however, and you’ll recover from it quickly with timely payments.
- Status and number of applications. An application for a balance transfer that’s rejected will have a negative impact on your account. Applying for several credit cards at the same time or within a short period of time will have a similar outcome on your file. New credit accounts constitute 10% of your credit history, so it’s important to consider this when applying for a new card.
- Repayment history. Being unable to meet the regular minimum repayments and not repaying your balance by the end of the promotional period can increase your level of debt and have a negative impact on your credit score.
- Remaining accounts. Failure to close your old account after you’ve transferred your balance to a new card can have a negative impact on your credit score unless you’re making regularly repayments on both accounts.
- Multiple transfers. Not being able to repay your debt by the end of the promotional period and having to move the remaining amount to another balance transfer credit card can also look bad on your credit file.
Could a balance transfer credit card help my score?
Your credit score may also make a positive shift, albiet potentially a small one. Initiating a balance transfer can lift your credit score by increasing your credit utilization rate. As the term implies, it’s how much of your available credit you’re using.
So if you have a balance of $500 and a credit limit of $1,000, your credit utilization rate is 50% ($500 divided by $1,000). Lenders like to see a low credit utilization rate; they want to see that you’re not anywhere close to maxing out your credit. The lower your utilization rate is, the better it is for your credit score.
How can I prevent my balance transfer from having a negative impact on my credit rating?
There are a few easy steps you can follow to keep your credit file in good standing when conducting a balance transfer:
- Don’t apply too often. When applying for credit cards, try to spread your applications over six months or one year periods. Applying for new cards over a longer period of time will have a less of an impact on your credit file.
- Review terms and conditions. Go through the balance transfer offer terms and conditions at the very onset. Account for all applicable fees including any hidden charges, ongoing annual fees and calculate whether you can afford the card. You’ll also need to confirm whether you meet all of the eligibility requirements such as minimum income, credit score and residency, and that you have all of the required documents to ensure your application isn’t rejected.
- Pay on time. Making a late payment can result in the termination of the promotional balance transfer offer, so do your best to repay your balance on time. By repaying the entire balance before the promotional period ends, you demonstrate your willingness and ability to repay outstanding debts, and you can expect lenders to view this with favor. Not repaying the entire balance before the promotional period ends would have you paying higher interest on any outstanding balance, and can also impact your ability to get a new card.
- Avoid new purchases. Avoid making purchases during the balance transfer period, as this will increase your debt. Your repayments will automatically go towards whichever debt accrues a higher interest, which is more than likely going to be the purchase when a low or 0% balance transfer rate is in place. This means that you’ll be wasting funds you could be using to consolidate your debts to repay purchases. Again, your inability to repay your balance can have a negative impact on your credit score.
- Don’t cancel your old cards if you don’t have to. Annual fees may motivate you to cancel them. But if your old cards have no annual fee you may want to consider keeping them open so you can raise your credit utilization rate and decrease your debt-to-limit ratio. Read on to understand what that means.
Maximum balance transfer rule
The most you can transfer will depend on the credit limit of the credit card you’re transferring to. That maximum credit limit will depend heavily on your credit score. Because of how these interact, your credit score will likely directly affect how much of your debt you can transfer.
You may see a slightly lower limit on how much you can transfer at times. This is almost always because of a balance transfer fee, which normally adds 3% to 5% to the cost of the transfer. For a debt of $5,000 and a 5% transfer fee you would need a credit limit of $5,250 (5,000 x 1.05) or more.
Taking a closer look at credit utilization rate
Be careful about what transferring your debts might do to your credit utilization rate, also known as debt-to-limit ratio, with multiple balance transfer credit cards. Your credit utilization rate is how much credit you have versus how much you’re using. Or, more technically, the amount of outstanding balances on your cards divided by the sum of each card’s limit.
Understanding your debt to limit ratio
- You have a $500 balance on your current card. This card has a $1,000 credit limit. Right now, your credit utilization rate is 50%.
- Now you transfer that $500 balance to another card with a $2,000 credit limit, which brings your credit utilization rate down to 25% (500 divided by 2,000).
However, a new balance transfer credit card with a maximum limit of $2,000 and a transfer of $2,000 worth of debt onto it would bring your credit utilization rate on your new card up to 100%.
As a rule of thumb, creditors like to see a credit utilization rate of 30% or less — you can see how you’ll need to consider both of your credit utilization situations — on your old card and your new card — to understand how it affects your score.
Further, a new credit card will reduce the average age of your credit accounts, and around 15% of your credit score depends on credit age.
If you do your research, make a plan and use your best judgment on future choices, a balance transfer card could be the first step toward financial freedom.
What goes into my credit history?
|Credit card details||Percentage of credit file|
Type of credit
Similar to any type of credit card, a balance transfer credit card can have a negative impact on your credit rating. Researching and comparing your balance transfer credit card options beforehand will ensure you’re applying a card that you’re both eligible for and can afford, increasing your likelihood of approval.
Managing your card with a budget in mind and doing your best to repay your balance before the promotional period ends is another way you can reduce the impact a balance transfer has on your credit card. Balance transfers can be a great way to consolidate your debt without the cost of interest, but conducting research and managing your finances is crucial if you want to minimize the impact it could have on your file.
Can a Balance Transfer Hurt Your Credit Score?
Find out what a balance transfer means for your credit score and when it’s right for you.
What Is a Balance Transfer Credit Card?
A balance transfer is a promotion offered by a credit card company that allows you to transfer debt to a new credit card and pay low or no interest on the balance for a limited period of time. Balance transfers are typically used to pay off all or a portion of higher interest debt, such as a credit card or loan, and move it to a card with a lower interest rate.
Depending on the terms of the offer, using a balance transfer card to pay less interest can add up to big savings. You could use the money to pay down the principal balance on the card faster and avoid even more interest charges.
Every balance transfer offer is different, so be sure to read the fine print carefully. Most charge a transfer fee that ranges from 3% to 5% per transfer. Some charge high interest rates after the promotional period expires; however, the best transfer cards offer a reasonable interest rate after the grace period, given your credit rating, of course. The amount you can transfer is subject to the credit limit you receive on the card.
Does a Balance Transfer Hurt Your Credit Score?
If you could benefit from a balance transfer, you might be like Derek and wonder how it would affect your credit. It depends on several factors, such as:
- whether you use a balance transfer to pay off a credit account in full
- the total balance you transfer
- whether you close a credit account
- how much new available credit you’re given
One of the factors used to calculate credit scores is the number of recent inquiries in your credit file, such as applications for new credit. Inquiries only make up a small percentage of your scores, so applying for a new credit card will typically cause a slight, temporary reduction.
However, there’s another, more important factor that determines credit scores called the credit utilization ratio. Your ratio is the amount of debt you’re carrying on revolving accounts (such as credit cards and lines of credit) divided by your available credit on those accounts. Using 30% or less of your available credit is recommended for optimal credit.
Getting a new credit card instantly raises your total available credit, which lowers your credit utilization ratio, and boosts your credit scores. The opposite is true when you close a credit card. So, as long as you don’t close a card after transferring a balance to a new card, the net effect should raise your credit scores.
Loans don’t factor into credit utilization ratios; however, having a mix of both installment loans—such as a car loan or mortgage—and revolving accounts is beneficial for your credit. Therefore, paying off a loan by transferring the entire balance to a transfer card could have a negative effect on your credit, especially if it were your only installment account.
But the effect of closing a loan would probably be a wash against the positive effect of receiving additional available credit on the transfer card. Additionally, the result of any change to your credit always varies depending on your unique credit history.
Should You Do a Balance Transfer?
Unless you have a big purchase planned for the near future, such as buying a home or car, I wouldn’t be too concerned about the credit implications of a balance transfer. Instead, focus on whether it would save you money and improve your overall financial health in the long run.
Balance Transfers Affect Your Credit Score – Here’s How
If you have a balance on a high-interest credit card and are looking to pay it off, balance transfers are a good idea. There are many credit cards out there that even offer promotions to get you to open an account and transfer your debt.
For example, some offer up to two years to pay off your debt interest-free. Others waive balance transfer fees to make it even more inexpensive to move your debt.
But while balance transfers are a great way to pay off debt fast, they can harm your credit if you’re not careful.
Here’s how balance transfers affect your credit score
Similar to just about everything credit-related, there’s no way to know for sure exactly how your balance transfer will impact your credit score. There are a few different factors that go into that calculation:
- How much you’re transferring
- The credit limit on your new card
- Whether you open or close an account to do the transfer
- How long it takes you to pay down the balance
Now, let’s go into detail for each factor.
How much you’re transferring
While it’s normal to transfer debt from just one card to a new one, some banks allow you to make multiple transfers from different banks. Depending on how much debt you have on multiple cards, moving it all into one place can spike your credit utilization.
“Credit utilization is a part of your credit score calculation and is defined by the amount of credit you use as compared to your credit card limits,” says Wendy Moyers, a Certified Financial Planning™ professional.
For example, say you have the following credit cards:
- A Card: $3,000 balance / $10,000 credit limit
- B Card: $1,000 balance / $5,000 credit limit
- C Card : $500 balance / $2,000 credit limit
“After timely payment, the credit utilization ratio is the second highest factor in calculating your credit score,” says Moyers. “The ideal credit utilization ratio is below 30%,” both on each card and across all cards combined.
For the above cards, your credit utilization would be as follows:
- A Card: 30%
- B Card: 20%
- C Card: 25%
- Combined: 26%
As you can see, all of these are at or below the recommended threshold. But if you transfer all of those balances to a new card, your credit utilization on the new card could spike. Of course, we need to know the credit limit on the new card to know for sure.
Calculate how much debt you currently have, then consider the next factor.
The credit limit on your new card
Now that you know how much debt you have look at the credit limit on the new card you’re transferring your balances to. In this scenario, let’s say Card D has a credit limit of $7,500.
If you were to transfer all three balances, you’d have a $4,500 balance on the new card, giving you a credit utilization of 60%.
Of course, this is counteracted a bit by the fact that you now have a 0% utilization on the other three cards. But your credit is still likely going to take a hit with the new high balance.
Whether you open or close a card to do the transfer
Every time you apply for a new credit card account, the hard credit check the lender does during the application process can knock a few points off your credit score. What’s more, adding a new account immediately lowers the average age of all of your accounts.
Since the length of your credit history is one of the factors that go into your credit score, a lower average age of accounts can have a negative impact on your credit score.
Closing a credit card can also negatively impact your credit score. That’s because by closing it, you no longer have that available credit to help lower your aggregate credit utilization.
How long it takes you to pay down the balance
While transferring a balance can spike your credit utilization, that doesn’t mean the impact on your credit score is lasting.
In fact, your credit utilization is calculated on a monthly basis. So, if you do the transfer in one month and pay off the entire balance the next month, your credit score will bounce back immediately.
If, however, your balance transfer results in a high credit utilization and it remains high for months while you pay down the balance slowly, the negative effects on your credit score will remain in place until you get the balance down to a more favorable level.
So, is a balance transfer worth it?
Although doing a balance transfer can hurt your credit score, it’s important to weigh the costs of the interest you’re currently paying against the negative effects. If you have high interest rates and big balances, transferring your debt to a card with a 0% APR promotion for balance transfers can save you hundreds of dollars, if not thousands.
Also, consider whether you’re planning on applying for credit in the near future. If you’re not, it doesn’t matter if your credit score dips for a few months. Once it gets back to where it needs to be, you’ll be in good shape again. That said, it’s important that you run the numbers before applying for a balance transfer card.
Also, compare cards from several different credit card companies to make sure you’re getting the right one. If you’re a business owner, consider a business credit card instead.
The more time you spend planning your balance transfer, the easier it will be to get as much value with as little negative impact as possible.
“Recognize that each of these actions may also affect your score, so it is important to be careful what solution you decide,” says Moyers. “The most important decision being to reduce your credit card as much as possible.”
How a Balance Transfer Affects Your Credit Score
Consumers seeking relief from high-interest credit card debt sometimes turn to balance-transfer offers to capitalize on an introductory 0 percent deal. Refinancing can be a smart cost-saving move, but it probably won’t go very far in helping your credit score — unless you pick the right path to paying down your debt.
What it really means to transfer a balance
A balance transfer means you’re moving debt from one credit card onto a different credit card, usually to take advantage of a lower interest rate. This doesn’t reduce your overall debt, and it doesn’t eliminate the interest that’s already accrued. But it does stop new finance charges from accumulating on your balance for a period of time, assuming you opt for a balance-transfer card that offers an introductory 0 percent or low-rate promotion.
For example, let’s say you’re carrying a balance of $10,000 on a card that charges 15 percent interest and your goal is to pay it off in the next 12 months. By transferring it to a card that’s offering 12 months at 0 percent, you would save $831 in interest.
Just keep in mind that you’re likely to incur an upfront cost for shifting your debt onto the new card. That cost is a balance-transfer fee. This fee is often 3 percent (and sometimes more) of the balance you’ve transferred, reducing your savings from the balance-transfer deal. In the example above, a 3 percent balance transfer fee would amount to $300, bringing your net savings down to $531.
That’s still a significant savings, but not quite as generous as it first appeared.
Nerd note: Some credit cards come with a long 0 percent APR period and give consumers an option to avoid balance-transfer fees.
Your credit score may improve, slightly
To get an idea of how a balance transfer will affect your credit score, you’ll need to understand a few basics about credit utilization ratio. This ratio is the amount of credit you’re using divided by the amount of credit you have available.
This number has a heavy influence on the 30 percent of your FICO credit score determined by the amounts you owe.
You’re more likely to obtain a higher credit score by keeping your credit utilization ratio below 30 percent at all times. This is considered by the FICO model in two ways — per card and across all of your cards.
Let’s illustrate this with an example, and assume that a consumer has two credit cards:
- Card A:2,000 balance with a5,000 limit
- Card B:1,000 balance with a3,000 limit
This consumer has a 40 percent credit utilization ratio on Card A, a 33 percent credit utilization ratio on Card B and an overall credit utilization ratio of 37.5 percent (for calculations, see the methodology section below). On each of her cards and overall, this consumer’s debt is over that 30 percent target.
One way to bring the ratio down would be to transfer the $2,000 balance on Card A to a new card, Card C. Say Card C has a 0 percent promotional APR and a $5,000 limit. Her credit utilization on Card A would fall to 0 percent, while Card C would assume the same 40 percent credit utilization ratio that Card A had originally. The FICO algorithm would look at her credit report and see a card with a high balance, which means she’d still be likely to get dinged for her per-card credit utilization ratio.
But the balance transfer caused her overall credit utilization ratio to drop to 23 percent, because opening Card C added $5,000 of available credit to her profile. This would cause her FICO score to rise a bit. But she’ll see 3-5 points shaved off her score in the short run because of the new credit inquiry from applying for the balance transfer card.
Another option for a bigger credit boost
Using a personal loan to refinance your credit card debt may be a good choice to save on interest and give your credit score a boost. Here’s why: Only the balances on revolving credit card accounts are factored into credit utilization ratio. So paying off credit card debt with a personal loan will immediately cause your utilization ratio to plummet and your FICO score to rise.
Again, the debt isn’t disappearing. But by converting it to a different kind of loan, you’re making it look different (and better) to the FICO scoring model.
The major drawback to using a personal loan over a balance transfer credit card is that interest on the loan begins accruing right off the bat — there’s no introductory 0 percent period to save you big bucks up front. However, you’ll still likely get a lower interest rate on a personal loan than what you’re paying on your credit cards, and if you get a fixed rate, it will be locked in for several years.
No matter which route to credit card debt refinancing you choose, be sure to make your payments on time and pay down the balance as quickly as possible. There are few things better for your well-being and your wealth than being debt-free.
To calculate the per-card credit utilization ratio on Card A:
$2,000/$5,000 = 0.4 (40 percent)
To calculate the per-card credit utilization ratio on Card B:
$1,000/$3,000 = 0.33 (33 percent)
To calculate the overall credit utilization ratio for Cards A and B:
$2,000+$1,000 = $3,000 (the balances on both cards combined)
$5,000+$3,000 = $8,000 (the limits on both cards combined)
$3,000/$8,000 = 0.375 (37.5 percent)
To calculate the overall credit utilization ratio for Cards A, B, and C:
$2,000+$1,000= $3,000 (the balances on all cards combined)
$5,000+$5,000+$3,000=$13,000 (the limits on all cards combined)
$3,000/$13,000= 0.23 (23 percent)