Do Balance Transfers Affect Credit Score?
A balance transfer may sound like a good idea, but it may impact your credit score. Here’s how.
Contributing Writer at Tally
September 20, 2022
High-interest credit card debt can impact your personal finances, as the annual percentage rate (APR) the credit card company charges can consume a significant portion of your monthly payment. This is why it can take upward of a decade to pay off a few thousand dollars of credit card debt if you only make the minimum payment.
Some credit card issuers will offer special promotions, like an introductory APR, for balance transfers to help attract new cardholders. Some offers may include interest rates as low as 0% for 12 to 18 months. These balance transfer credit cards can help you pay off high-interest credit card debt without paying an extra penny of interest.
However, you may wonder, “Do balance transfers affect credit score?” We answer this question below.
Do balance transfers affect credit score?
Performing a balance transfer can impact your credit score positively and negatively. We’ll cover all the common ways a balance transfer can help or hurt your FICO®credit score.
Positive credit score impacts
Do balance transfers affect credit score positively? Yes, here are a few ways a balance transfer can improve your credit score.
Lowers your credit utilization ratio
If you open a new credit card account to take advantage of an intro promotional offer, like 0% APR on balance transfers for a specific period, you will add to your total credit card limits. Given you don’t add on any additional new debt, this will reduce your credit utilization rate, which is your total credit card balances relative to your total credit limits.
For example, if you have $5,000 in credit card balances and a total credit limit of $10,000, you have a 50% credit utilization ratio. If you open a new balance transfer credit card with a $10,000 credit limit, you now have $20,000 in credit limit and still only a $5,000 total balance. This is only a 25% utilization rate.
Your credit utilization rate affects the amounts owed variable in the FICO scoring algorithm, which makes up 30% of your credit score. This means a reduced credit utilization rate can improve your credit score.
Reduces your total debt more quickly
You no longer have monthly interest charges when you perform a balance transfer to a 0% APR credit card. This means 100% of your monthly payments go toward your balance, so the debt you owe will fall more quickly. This falling balance may result in quicker credit score improvements.
Negative credit score impacts
The credit score boosts a balance transfer can deliver are tempting, but you should also consider the potential negative impacts. Here are a few to think about.
Leads to credit inquiries
When you apply for a new balance transfer credit card, the credit card issuer will perform a hard inquiry on your credit. This will appear on your credit report and may negatively impact your credit score for up to 12 months.
Generally, a credit inquiry will reduce your credit score by less than five points. However, if you don’t pay off the balance transfer card in time and want to continue using 0% APR, you will need to apply for another credit card and take another hard inquiry.
Increases credit utilization ratio
Credit card companies sometimes offer balance transfer specials to existing customers whose cards have remained dormant to entice usage. If you use an existing credit card, you won’t benefit from increased available credit.
On top of that, many credit card companies charge a 2% to 3% balance transfer fee that it adds to your balance. So, if you transfer $10,000 in credit card debt to your card, you will end up with an additional $200 to $300 on your balance from the transfer fee. This will increase your overall credit utilization ratio and potentially lower your credit score.
Affects length of credit history
Length of credit history is another factor in the FICO Score algorithm and accounts for 15% of your score. Many variables impact this factor, two of which are the age of your newest account and the average age of all your accounts. Opening a new balance transfer credit card account will negatively impact both variables, potentially causing your credit score to fall.
Impacts new credit
The new credit factor in the FICOscoring model has a 10% impact on your credit score. It considers a range of variables, one of which is how long it’s been since you opened a new account. If you opened a new credit card account for the balance transfer offer, this could negatively impact the new credit factor and cause a short-term credit score drop.
How to minimize a balance transfer’s negative credit score impact
A balance transfer can impact your credit score in many ways. Here are tips to help reduce its negative impact.
Open only one new balance transfer card
Minimize the number of credit inquiries that hit your credit report by finding the best balance transfer credit card offer for you and applying for only that one. This also prevents you from opening multiple new credit accounts and impacting your length of credit history and new credit variables.
Don’t close your old credit cards
As you transfer your balances to your new balance transfer credit card, don’t close the old accounts. Closing them will further impact your length of credit history variable and potentially lower your credit score even more.
Budget to pay it off within the promotional term
Set your budget so it allows you to fully pay off the balance transfer credit card before the 0% interest rate promotional period ends. This will help you by reducing your overall debt more quickly and prevent you from needing to open a new balance transfer account when the APR offer expires.
Balance transfers can positively and negatively affect your credit score
Do balance transfers affect credit score? Yes, positively and negatively. However, you can limit the negative impact by applying for only one balance transfer credit card, leaving your other credit card accounts open and budgeting to pay off the balance transfer credit card within the promotional period.
The key is to weigh the positive and negative impacts and decide if the short-term risk to your credit score is worthy of the long-term payoff of getting out of debt with less interest.
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†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.