How Balance Transfers Can Impact Credit Score
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Looking for a way to lower your bills? If you have a credit card with a high balance and high interest rate, you may want to consider transferring that credit card debt to a new card with a low interest rate or a 0% introductory rate.
The total debt amount won’t change, but your monthly payment will fall. The majority of savings, however, will come if you eliminate the debt by paying off the balance completely. That should cause your credit score to rise, which is always good news.
But bad things can also happen to a credit score with a balance transfer credit card used for debt consolidation. We’ll review the good and bad impacts on a credit score when doing a balance transfer and how you can mitigate them.
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What is a balance transfer credit card?
You may have received a balance transfer offer from credit card companies, often with a 0% introductory APR that can last for about 12-18 months. The offers are typically offered to new customers with good credit.
The new card may have an annual fee or a balance transfer fee, which offsets some savings of transferring a balance from a high-interest credit card to a card with no interest or a low interest rate.
It’s best used if you plan on paying off the transferred debt completely before the 0% APR offer ends. If you do, then you’ve paid no interest on the debt, which can save you hundreds or thousands of dollars. Your payments will go toward the principal, allowing you to pay off the debt faster.
When the 0% intro promo ends, a variable APR will apply to any unpaid balance.
If you don’t qualify for a 0% balance transfer credit card, you may qualify for a card with a lower interest rate than the card where your credit card balance already sits. You can still save money this way, mostly by paying off the new card as soon as possible. Make sure that it’s low enough to make up for any balance transfer fees or other fees you may pay.
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How your credit score could drop
Credit scores move in various ways, so it can help to know how your score could drop with a balance transfer from an existing credit card to a new credit card.
The transfer by itself won’t move a score, but how you deal with the transfer and other aspects of your use of credit could have a negative effect. Here are some ways a balance transfer can lower your credit score.
Hard inquiry
A hard inquiry on your credit report is usually done when applying for a new credit card. Your score may fall a few points initially, and the credit inquiry will stay on your credit report for up to two years.
New credit accounts for 10% of a FICO Score. Avoid too many hard inquiries by only applying for one card, and only when you need it.
Credit history age drops
A new credit card account lowers the length of credit history that you already have by reducing the average age of your credit. Opening a new account will lower the average age of all of your accounts.
Generally, the longer your credit history, the higher your credit score. Credit history accounts for 15% of a FICO credit score.
One way to mitigate this impact is to keep old credit accounts open. Even if you don’t use an old account, and provided it doesn’t have an annual fee, it can be worth keeping open to keep your credit age high.
You don’t pay the balance off
Reducing your debt is one of the best ways to raise a credit score, and not paying off a new balance transfer card can keep you in debt and hurt your credit score. If you have a 0% intro APR, it could rise to 20% or higher if the balance isn’t paid off before the promo period ends. That could leave you in more debt than before getting the new credit card.
Credit utilization rate rises if debt is not paid off
The amount of money you owe on a credit card called a credit utilization rate or credit utilization ratio, accounts for 30% of a FICO Score.
Your overall credit utilization is the amount of available credit you’re using. The higher the percentage of credit you use, the more it can hurt your credit. Using more than 30% of your available credit is considered negative by creditors.
Suppose you have one credit card with a $10,000 credit line and a $2,000 balance. That’s a 20% credit utilization rate.
If you don’t pay off a balance transfer, your credit utilization rate could rise. If possible, do whatever you can to lower the rate to less than 30%.
Paying bills late
If you habitually do not pay your bills on time, including your credit card bills, you may not want to make a balance transfer to a new line of credit.
On-time payments are the best way to raise a credit score, with payment history accounting for 35% of a FICO Score. Late payments, or no payments at all, can quickly lower a credit score. Late fees can also accrue.
How your credit score could improve
Now for the good part: raising your credit score. A new line of credit can raise your credit score if used correctly. Here’s how:
Lower credit utilization rate by paying off debt
Transferring a balance from one credit card to another won’t affect your credit score. But if you use the lower interest rate to help you pay off more of the principal amount of the debt, you’ll save money and use a lower percentage of your available credit. That’s the credit utilization ratio we discussed earlier, although by paying the debt off, you’re lowering the ratio.
Transferring a credit card balance should drop your credit utilization ratio. But that depends on three factors:
- Keeping the first card but not using it because it now has a zero balance.
- Not making more purchases on the new balance transfer card.
- Paying off the balance on the new card.
Eliminating debts helps build better credit scores. The days of making the minimum payment should end if you aim to eliminate your debt.
The amounts you owe account for 30% of your FICO credit score. Credit utilization is also a major factor in the VantageScore credit scoring model. Lowering the amount you owe and using less of the credit available to you should raise your score.
Your debt will be lower
The point of a balance transfer card is to pay off the debt that’s transferred to a new card. If the interest rate is lower, the balance transfer fee isn’t too high, and you use the money saved to pay off the balance as fast as possible, your overall debt will be lower.
If you continue buying things with the card and can’t afford to make payments, then the debt could increase, and the interest charges could eat up more of your money.
Apply for one card only
Applying for just one credit card that has a low intro APR and will work for a balance transfer can raise your credit over time much more than applying for a few cards at the same time. Too many credit checks can hurt your score.
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What a balance transfer won’t do
Moving a debt from one place to another won’t eliminate debt. It’s still yours to pay off. That includes interest on the old account.
You may want to close the old account to no longer deal with that card. Closing an account that’s paid off could hurt your credit score because your credit history will shorten.
If you close the old account, it will remain on your credit report. If the account had negative marks, such as missed payments, they will stay on your credit report for seven years and will still be factored into your credit scores. Accounts closed in good standing can stay on your report for 10 years.
Transferring a balance to an existing credit card
If you already have a few credit cards, and one of them has a much lower interest rate than the others, and you have a high balance on a card that charges a high interest rate, then it may be worth it to make a balance transfer to the lower-rate card that you already have.
Your credit score won’t be affected because you’re not opening a new card and getting hard inquiries. Also, your credit utilization ratio won’t change because your available credit won’t change.
Be sure to factor in the balance transfer fee. A 3% fee on a $10,000 transfer is $300, so you’d want to save at least $300 with a lower interest rate.
Not every card offers a balance transfer, so shop among your existing cards for one that does and make sure the low rate is worth the cost.
Costs
Here are some of the costs even some of the best balance transfer credit cards can have.
- Balance transfer fee: Not all companies charge these fees, which can be a fixed amount, such as $5 per transfer typical, or a percentage of the balance you’re transferring, such as 3% to 5%.
- Annual fee: This fee ranges from $99 to $150, though you may find them as low as $39.
- Changing annual percentage rate: The APR is the interest rate charged over a year on a balance. Of course, paying 0% is best, but when that introductory rate expires, a new rate will start. The rate you get depends on your credit score, among other things. Also, credit card APRs can change monthly to go up or down at any time.
- Late bill payments: Credit cards typically charge $30 for a first late payment and $41 for subsequent ones. However, the Consumer Financial Protection Bureau proposes that late fees drop to $8 per violation.
Pros and cons
Pros
- Reduced debt. Transferring a credit card balance to a card with a 0% promo or a lower interest rate can allow you to pay less or no interest and use that savings to pay down more of the principal amount of the balance. Your debt could be paid off a lot faster while saving money.
- Higher credit score. Paying off a debt in full can cause your credit score to rise, making accessing more credit easier and making it cheaper to borrow.
- 0% interest is like magic. If you qualify for a 0% interest balance transfer credit card, you won’t pay any interest and can use that savings to pay off the balance faster than you could by paying interest.
Cons
- Credit age falls. Getting a new credit card lowers the average age of your accounts and credit history, which can account for 15% of a credit score.
- Transfer fees. Some companies charge balance transfer fees. A flat rate of around $5 is charged, or 3-5% of the amount being transferred is charged. For a $5,000 transfer, this works out to a fee of $150 to $250.
- Less spending required. To take advantage of the lower interest rate on a balance transfer card, you may need not to use the card for new purchases. This will add to your debt if you don’t pay the charges off when the monthly payment is due.
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The bottom line
If you have a high credit card balance and are being charged a high interest rate, it can be difficult to pay it off. A balance transfer can be a good solution if you find a credit card with either a low interest rate or a 0% introductory rate.
The money you save can go toward paying down the debt to pay it off completely as fast as possible.
Your credit score can drop with a balance transfer, but it should rebound once the debt is paid off.
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Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
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