A balance transfer could help you avoid high interest rates and pay down your credit card debt faster, but you also have to consider how it might affect your credit. Depending on your situation, a balance transfer could ultimately hurt your credit score, boost your score, or have no effect whatsoever.
We’ve outlined a few scenarios to help you understand the details involved with a balance transfer and how they work. This can help you know whether a balance transfer will hurt your credit score and whether it’s the right move for you.
How a balance transfer could hurt your credit
A balance transfer typically doesn’t directly affect your credit, but there are a few negative effects a balance transfer could have on your credit score. Here are the primary ways a balance transfer could hurt your credit:
Hard credit inquiry
The recommended way to do a balance transfer is to apply for a balance transfer credit card. These cards typically come with 0% introductory annual percentage rate (APR) offers, which means you wouldn’t have to pay any interest on a balance you transfer over during the promotional period. This can give you some breathing room to work on paying down your debt without worrying about accruing more debt through interest.
But if you apply for a credit card, you’ll typically be hit with a hard inquiry on your credit report. Hard inquiries let lenders, such as credit card issuers and other credit card companies, assess your creditworthiness to determine whether they should lend you credit. A hard inquiry could lower your FICO, VantageScore, and other credit scores by a few points and stay on your credit reports for up to two years.
Average age of accounts
One of the factors that helps determine your credit score is the average age of your credit accounts, including credit cards and personal loans. If you qualify for a new balance transfer card, your average length of credit history will immediately decrease because you’re adding a new line of credit into the mix. This could potentially lower your credit score as well.
If you have an extensive credit history with multiple old accounts, this factor might not be a big deal for you since one new credit card might not offset your average age too much. But if your existing credit history isn’t long, a new account could make a bigger impact on your credit.
If you do get a new balance transfer card, consider keeping the old card open as long as it doesn’t have an unreasonable annual fee or other issues. That helps with your average account age, payment history, and credit utilization.
High credit utilization
Another factor that helps determine your credit score is how much of your available credit is being used. This is called credit utilization, or your credit utilization rate, and you typically want to shoot for using 30% or less of your available credit. So if you have a credit card with a $1,000 limit, 30% or less would be a balance of $300 or less. If you go above this mark, you could see a drop in your FICO credit score.
With balance transfers, be careful that you don’t get too comfortable with having high balances. It might be tempting to transfer the balance and pay the minimum required payment, but it’s generally best to pay as much as possible to get the balance paid off before the end of the promotional period. You should also aim to avoid racking up a new balance on the card you transferred the balance from.
How a balance transfer could help your credit
In certain situations, a balance transfer could help your credit. This won’t always be the case, but here’s one scenario to consider.
What happens if you currently have high balances on multiple credit card accounts and transfer those balances to a balance transfer credit card? You lower the credit utilization on the accounts that now have no balance. You might have a few credit cards with high balances above the recommended 30% credit utilization ratio. But after a balance transfer, those cards drop to a 0% ratio, and your average credit utilization across all accounts could also go down.
To help illustrate this, let’s say you have three existing credit card accounts carrying balances.
|Credit account||Credit limit||Account balance||Credit utilization|
|Total of all cards||$16,000||$7,000||43.75%|
To find the credit utilization ratio, divide the account balance by the credit limit on each account. For the average credit utilization across all accounts, divide the total account balance by the total credit limit, which is 43.75% (7,000 / 16,000 = 0.4375).
|Credit account||Credit limit||Account balance||Credit utilization|
|Total of all cards||$28,000||$7,000||25%|
Now let’s add a balance transfer card (Account D) into the equation. All balances are moved to this new card, which has a credit limit of $12,000. Your balance transfer card ends up with a credit utilization of 58%, while the three other accounts finish with 0% credit utilization. Your overall credit utilization ends up at 25% (7,000 / 28,000 = 0.25), which is much lower than before.
You can see how your overall credit utilization can go down with a balance transfer and potentially help improve your credit score. But one thing to keep in mind is that your balance transfer credit card might now have a high balance and be over 30% credit utilization.
If your card has a 0% introductory period, it’s best to take advantage of this promotion and pay down a large balance as quickly as possible while there’s no interest building. This strategy can help lower your credit utilization over time in an effort to build your credit.
Moving high-interest credit card debt to a card with a low interest rate will make it easier to pay it off, which helps your credit score by lowering your credit utilization. You'll likely need to make more than the minimum payment each month to make a real dent in your credit card balance. You'll also want to maintain other good credit habits like making payments on time so you avoid late fees and dings to your credit score.
How to decide if a balance transfer is right for you
The main goal of a balance transfer should be to save you money. This is why balance transfers exist, and there’s typically no other reason why you would do one. If a balance transfer isn’t going to save you money, it’s likely not the right move. Here are a few tips to keep in mind if deciding whether a balance transfer might make sense for you:
- You have a good credit score: If you want to do a balance transfer, you’ll need a balance transfer credit card. If you compare credit cards and balance transfer offers, not every card comes with a 0% intro APR offer on balance transfers. You typically need a good or excellent credit score for the best cards with these offers, such as the Citi Double Cash® Card.
- You can pay off the balance: If you can qualify for a credit card with a 0% intro APR offer on balance transfers, you’ll have the opportunity to avoid interest on balance transfers for a certain amount of time. A balance transfer might make sense if you can pay off your balance during the promotion’s time period. Otherwise, the promotion will end, and your balance will start accumulating interest again.
- It will save you money: As mentioned above, a balance transfer typically only makes sense if it’s going to save you money. Balance transfer cards have balance transfer fees, so you have to calculate how much you would save on interest versus how much the fee would cost.
- It won’t significantly hurt your credit: You can’t avoid a hard inquiry from signing up for a balance transfer credit card, but your credit score going down a few points typically only matters short term. But make sure a balance transfer doesn’t have any big, negative impact on your credit, such as having a high credit utilization ratio that isn’t going down because you’re not paying off your balance.
How long does it take for balance transfers to show up on credit reports?
A balance transfer itself won’t show up on your credit report, but you should see a hard inquiry on your report if you apply for a balance transfer credit card. Hard inquiries are typically reported immediately to the credit bureaus by lenders, but they could take up to 30 days or longer before showing up on your credit report. A hard inquiry could stay on your credit report for up to two years. You’ll also see the change in account balances within a month or two.
Is it a good idea to do a balance transfer?
It depends on your situation. If you’re able to qualify for a 0% introductory APR offer or a lower interest rate than you’re currently paying, it could make sense to do a balance transfer. This could help you pay down debt while avoiding high interest rates, but you have to consider the balance transfer fee, typically 3% to 5% of the balance transfer amount.
If you don’t anticipate being able to pay off the card before your balance transfer promotional period ends, keep in mind what the interest charges will be once the 0% period ends as you decide whether to move forward.
How many points does a balance transfer hurt your credit score?
A balance transfer won’t directly affect your FICO score at all. But if you apply for a balance transfer credit card, you’ll be hit with a hard inquiry, which could drop your score by a few points. Additionally, opening a balance transfer card could lower the average age of your credit accounts, which could also affect your credit score.
Whether you should proceed with a balance transfer depends on your specific situation. You have to weigh the pros and cons of this financial move, including calculating how much you might save on interest compared to how much you would pay in balance transfer and annual fees. Another important factor to consider is whether your credit will be affected by a balance transfer.
Apart from these factors, how do you decide which balance transfer card might be the best fit? Fortunately, there are plenty of credit card offers to choose from, whether you want a card with a longer 0% intro APR rate or one that also offers valuable rewards. For more information, check out our list of the best balance transfer credit cards.
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