Do Balance Transfers Affect Your Credit Score?

A balance transfer credit card can be an effective tool to help you pay off high-interest debt like credit cards and loans. But if you’re considering this debt consolidation option, it’s important to consider how it will affect your credit score.

The way a balance transfer impacts your credit depends on several factors, including how you manage your new account. In some cases, using a balance transfer credit card might trigger a drop in your credit score. Yet if you approach the process responsibly, a balance transfer may have the potential to improve your credit score as well.

Below are some of the most important details you need to know about how balance transfers influence credit scores. The following guide also provides helpful tips on how to qualify for a balance transfer credit card and how to maintain a good credit score after you use a balance transfer to consolidate debt.

What is a balance transfer?

A balance transfer is the process of moving debt from a credit card, loan, or multiple accounts to another credit card. In many cases, credit card companies offer promotions that feature a 0% or low APR for a limited time (often 12-21 months) on balance transfers. These promotional APR offers may be available when you open a new balance transfer credit card. You might also be able to find balance transfer offers on some existing credit card accounts.^[1]

Low-APR and 0% APR balance transfers give you the chance to save money on interest charges. If you can avoid future overspending and put extra cash toward eliminating your debt, a balance transfer might make it easier to pay off your credit card debt faster as well.

What is a balance transfer fee?

It is important to point out that balance transfers typically feature balance transfer fees—typically 3% to 5% of the total amount you transfer to your account. If you transfer $5,000 and your card issuer charges a 5% balance transfer fee, for example, the transaction would cost you $250.^[2]

Therefore, it’s important to evaluate your situation, do the math, and make sure that a balance transfer makes good financial sense before you move forward. For example, if you plan to pay off your debt in a month or two with a bonus or tax refund, the cost of a balance transfer fee might outweigh the potential interest savings you would see from a promotional APR. Instead, you might be better off to skip the transfer, leave the debt with your original credit card issuer for the time being, and pay off the balance as soon as you have the funds to do so.

On the other hand, if you know it will likely take you months to pay down your debt, the savings from a 0% or low-APR could far outweigh the cost of a balance transfer fee. (Tip: An online balance transfer calculator can make these types of evaluations much simpler.)

How a balance transfer could hurt your credit score

Most items that appear on a credit report have the potential to help or hurt your credit score. And the way you manage those accounts has a lot to do with how they impact your credit.

Balance transfer credit cards are no exception to the rule above. Below are three possible ways that you could damage your credit score with a credit card balance transfer.

Hard credit inquiry

Applying for a new balance transfer credit card could hurt your credit score. The good news is that if you experience credit score damage from a new account application, it’s likely to be minor.

When you apply for credit—balance transfer credit cards or other accounts—the card issuer or lender will typically check your credit report when it reviews your new account application. In the credit world, this type of credit check is called a hard credit inquiry.

Hard credit inquiries, like the ones that take place when you apply for a credit card or loan, may damage your credit score. Results vary, but one new hard inquiry usually takes less than five points away from someone’s FICO® Score. After 12 months, FICO also ignores any hard inquiries that show up on your credit report and they no longer affect your FICO® Score.^[3]

Note: When you check your own credit report, it’s a soft credit inquiry. Soft inquiries never damage credit scores. So, you don’t need to be afraid to review your personal credit information.

Length of credit history

Another way a balance transfer might hurt your credit score has to do with your length of credit history. Your personal age doesn’t factor into your credit score, but the age of the accounts on your credit report is another matter. A longer credit history can benefit your credit score, but actions that make your credit history appear younger could hurt your score instead.

When you open a new credit account, two meaningful changes may take place on your credit report.

• The average age of accounts on your credit report will decline.
• The age of your newest account on your credit report goes down.

Credit scoring models like FICO pay attention to both of the factors above when calculating your credit score. And when it comes to your length of credit history—worth 15% of your FICO Score—older is better.^[4]

On a positive note, merely opening a new balance transfer credit card shouldn’t inflict major harm on your credit score if you practice other good credit management habits. In fact, FICO says that around 25% of consumers with an 850 FICO Score (just 1.7% of the U.S. scorable population) still earned a perfect score despite opening one or more new credit accounts in the previous year.^[5]

Late payments and high credit utilization

Of course, the biggest issues you could face with a balance transfer card happen when you mismanage your new account. If you make either of the following mistakes, a balance transfer will most likely hurt your credit score instead of helping you.

Late payments: Missing a due date is never a good idea where your credit score is concerned. Payment history is worth 35% of your FICO Score. And late payments can remain on your credit report for up to seven years. But paying late after a balance transfer could be even more problematic.^{[6] [7]}

The amount of money you still owe on delinquent accounts affects your FICO Score. Therefore, missing payments after a balance transfer could possibly be a bigger deal than making late payments prior to consolidating your debt.^[6]

Credit utilization problems: Balance transfers can often lower your credit utilization ratio, the relationship between your credit card balances and limits. However, you can make mistakes during the balance transfer process that might increase your credit card utilization rate and hurt your credit score in the process.

Closing your original (paid off) credit cards is one possible mistake that could increase your credit utilization rate. Instead, you might consider leaving your paid off cards open, and keeping them somewhere safe where you won’t be tempted to use them while you’re working to pay down your debt.

A bigger issue, however, would be if you overspend again and charge up new balances on your paid off credit cards. Not only could this scenario increase your credit utilization ratio and damage your credit score, but it creates more debt.

If you’re worried about future overspending, a balance transfer may not be right for you. Instead, talking to a nonprofit credit counseling agency or considering other debt management options might be a better approach.

How a balance transfer could improve your credit score

Now for the good news—some people do experience credit score improvement after a balance transfer. Below are potential ways a balance transfer credit card might help your credit score.

Credit utilization ratio

As mentioned, balance transfers have the ability to help you reduce your credit utilization ratio. From a credit score perspective, lowering your credit utilization rate is probably the most important way a balance transfer could help you.

Credit scoring models calculate your overall (also called aggregate) credit utilization ratio by dividing your total credit balances by your total credit card limits.^[8]

Credit Utilization Ratio Formula:

Credit card balances ÷ credit card limits X 100 = credit utilization ratio

If you have a credit card with a $1,000 balance and a $1,000 limit, the credit utilization ratio on that account is 100% (1,000 ÷ 1,000 = 1 x 100 = 100%).

Now, imagine that you open a new balance transfer credit card with a $3,000 limit. Your total credit limit between the two accounts would increase to $4,000. Your total balance between the two accounts is still $1,000 (assuming you make no additional charges). These steps would lower your credit utilization to 25% (1,000 ÷ 4,000 = 0.25 x 100 = 25%).

In general, a lower credit utilization ratio is better for your credit score. According to FICO, maintaining a credit utilization rate below 10% and following other good habits like paying your credit obligations on time can help you earn and keep a good FICO Score.^[9]

Number of accounts with balances

Consolidating your debt with a balance transfer credit card could help your credit score in another way. Debt consolidation (through balance transfers or personal loans) can reduce the number of accounts with outstanding balances on your credit report.

FICO considers how many accounts have balances on your credit report. When you owe money to fewer creditors, it shows a lower risk of financial overextension. Therefore, cutting down on the number of accounts with outstanding balances on your credit report may improve your credit score.^[10]

What you need to qualify for a balance transfer credit card

Credit card companies determine who’s eligible for the different products they market to the public, including balance transfer credit cards. If your goal is to qualify for the most competitive balance transfer credit cards with 0% introductory APRs for up to 21 months, you’ll typically need good to excellent credit.^[11]

That doesn’t mean it’s impossible to qualify for a balance transfer card with fair credit or even bad credit. However, the terms credit card issuers extend may be less attractive until you fix your credit challenges.

A card issuer may also consider other details when you apply for a new balance transfer credit card. Your income, number of recent credit cards opened, and other factors could also determine whether a credit card company approves or denies your application.^[12]

How to maintain a good credit score after a balance transfer

A balance transfer could work in your favor when it comes to reducing your debt and improving your credit score. But there are a few important rules to follow if you hope to earn and maintain a good credit score after you use a balance transfer credit card to consolidate your debt.

1. Pay on time. When you’re working to establish positive credit history, paying your credit obligations on time is essential. Scheduling automatic drafts for at least the minimum payment could be a great way to stay on top of your due dates and avoid accidental mistakes.
2. Create a debt elimination plan. Finding ways to pay down your debt faster during a balance transfer could help you save money and improve your credit score. Consider pairing debt payoff strategies like the debt snowball or the debt avalanche with your balance transfer to speed up the debt elimination process.
3. Build good credit card habits. When you use a balance transfer to consolidate debt, it’s critical to develop good credit card management habits. Ideally, you should make a plan to pay off your credit card debt by the time the introductory APR expires. If you use any credit cards for new purchases, it’s important to pay off those balances in full by the due date each month. This approach allows you to enjoy the benefits your credit cards offer while protecting your credit score and avoiding interest charges.

Sources

1. Capitalone.com. “Introductory rate: What it is and how it works.” https://www.capitalone.com/learn-grow/money-management/introductory-rate/
2. Experian.com. “How to Avoid Balance Transfer Fees on Your Credit Card.” https://www.experian.com/blogs/ask-experian/how-to-avoid-balance-transfer-credit-card-fees/
3. myFICO.com. “Credit Checks: What are credit inquiries and how do they affect your FICO® Score?” https://www.myfico.com/credit-education/credit-reports/credit-checks-and-inquiries
4. myFICO.com. “What is the Length of Your Credit History?” https://www.myfico.com/credit-education/credit-scores/length-of-credit-history
5. FICO.com. “The Perfect Credit Score: Understanding the 850 FICO Score.” https://www.fico.com/blogs/perfect-credit-score-understanding-850-fico-score
6. myFICO.com. “What is Payment History?” https://www.myfico.com/credit-education/credit-scores/payment-history
7. Experian.com. “How Long Do Late Payments Stay On a Credit Report?” https://www.experian.com/blogs/ask-experian/how-long-past-due-remains/
8. Capitalone.com. “What is a credit utilization ratio?” https://www.capitalone.com/learn-grow/money-management/credit-utilization-and-credit-score/
9. myFICO.com. “What Should My Credit Utilization Ratio Be?” https://www.myfico.com/credit-education/blog/credit-utilization-be Accessed
10. myFICO.com. “What is Amounts Owed?” https://www.myfico.com/credit-education/credit-scores/amount-of-debt
11. Forbes.com/advisor. “What Is a Balance Transfer?” https://www.forbes.com/advisor/credit-cards/what-is-a-balance-transfer/
12. CNBC.com. “Here’s who’s eligible for a credit card and what factors card issuers consider when you apply.” https://www.cnbc.com/select/what-issuers-look-at-on-credit-card-applications/

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

Editorial policy

Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).