Do balance transfers hurt your credit score?

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A balance transfer can offer a chance to really tackle a debt. Instead of paying double-digit interest rates on debt on one or more cards, a balance transfer allows you to move what you owe onto a new credit card which will charge no or very low interest for a year or more.

Sounds good, right? And it can be good in the long term if you plan responsibly. But in the short term, a balance transfer can ding your credit score—and in the long term, if you’re not careful, a balance transfer can just compound your problems.

What is a balance transfer?

A balance transfer is essentially a marketing tool offered by card issuers to entice you to open a new card. The best balance transfer offers usually feature a 0 percent APR for a specified period, usually between 12 and 18 months. You will be allowed to transfer a preapproved amount of debt onto the card.

During the specified time range, interest charges won’t accumulate and your debt won’t grow. But afterward, the card issuer will begin to charge its usual interest rate on whatever debt remains. Also, if you miss a payment or make a payment late during that introductory period, you can lose your promotional period and get hit with the regular interest rate straight away.

Note that most balance transfer offers come with a balance transfer fee. These range from 3 percent to 5 percent of the amount of debt you are transferring.

How a balance transfer can help your credit score

In the short term, a balance transfer can help your credit score by lowering your credit utilization rate. This is the percentage of your total available credit that you’re using and makes up 30 percent of your credit score.

Let’s take a look at an example. Say you currently have two credit cards. Your first card has a credit limit of $10,000 and a current balance of $5,000. Your second card has a credit limit of $4,000 and a balance of $2,000.

Your total credit limit, then, is $14,000 and your total debt is $7,000. That gives you a credit utilization rate of 50 percent—that’s too high. Most experts recommend a credit utilization rate of no more than 30 percent, although consumers with excellent credit usually have a credit utilization in the single digits.

Now you get a third card with a balance transfer offer. This one has a credit limit of $15,000. Thanks to the addition of this card, your total credit limit is now $29,000. So your $7,000 balance gives you a comfortable 24 percent credit utilization. That lower utilization is going to help your credit score.

In the long term, if you’re able to use the balance transfer opportunity to pay down your debt or eliminate it completely, that will also help your credit score even further.

How a balance transfer can hurt your credit score

Every time you add a new credit card, it can affect your score. It starts when you apply for the card. The issuer will run a hard inquiry on your report, which can shave off up to five points. The inquiry will stay on your report for two years, but the penalty will fade away in half that time or less.

Once you get the card, your score will likely experience another temporary dip because your credit score is partly based on the average age of your credit. Going back to the example above, if you’ve had one card for four years and the other for six years, the average age of your credit is five years. But when you add the new card the average age of your credit goes down to a little over three years.

The new card also has a potential credit utilization rate problem. Even though your credit utilization ratio is lowered overall, if you transfer all the debt onto one card, your per-card utilization ratio will be high on the new card.

So, for example, if you were to get the above-mentioned new card, with its $15,000 credit limit, and transfer all $7,000 of your debt onto it, you’d have a credit utilization rate of 46 percent on that one card. For some credit agencies, that per-card rate can also be a strike against your credit score. And if your debt was higher or your credit limit on that card lower, your score could really take a hit. Borrowing up to your credit limit, even on just one card, can lower your credit score by 100 points.

Finally, you don’t want to get turned down for too many cards in your search for a balance transfer offer. If you apply and apply for new cards but can’t get approved, all those hard inquiries will lower your credit score.

How can you get a balance transfer offer?

The surest way to get a balance transfer is to accept an offer from a card issuer, saying you’ve prequalified for a new card with a balance transfer option. This isn’t an ironclad guarantee, but you are likely to be approved for it.

Otherwise, you can go looking for one. If you do, be advised that most are only issued to borrowers with a score of 670 or higher on the 850-point FICO credit scoring scale. If you’re unsure if you will be approved, ask if you can pre-qualify with what’s known as a “soft” inquiry, which will not affect your credit score. Bankrate’s CardMatch tool is a great way to see what card offers may be available to you without a hard inquiry.

Tips for how to rebuild credit after a balance transfer

Adding a new credit card can hurt your credit score. But if you are able to use the card’s balance transfer offer to lower your debt, the short-term credit hit can lead to long-term gain for your credit score.

Here are three tips for getting the most out of your balance transfer:

  • Make a debt repayment plan that takes into account the length of your 0 percent interest period and stick to it. Paying off your entire debt during your intro APR period maximizes the benefits of your balance transfer and will help your credit score continue to rise afterward.
  • While your 0 percent interest period is active, stop charging on your other credit cards. Use cash or debit cards to cover your expenses, so you are only paying down debt, not adding to it.
  • When you resume using your credit cards, pay them off on time and in full to avoid charging up new credit card debt. Building a positive payment history, which is responsible for 35 percent of your credit score, will help you improve your credit as well as prevent interest accruing. In time, you may also earn back your grace period.

Alternatives to balance transfers

If you’re not sure if a balance transfer is right for you—perhaps the balance transfer fee doesn’t seem worth it, or the offers you’re getting don’t meet your needs—here are two other options:

Personal loan

You will not get offered a 0 percent introductory rate on a personal loan, but neither will the interest rates be as high as those for a credit card. If you do the math on the balance transfer fee, you may find a personal loan more attractive, even with the (temporarily) higher rate.

Personal loans are measured in years, generally between one and seven years, giving you more time to pay off the debt. It’s also possible to get certain personal loans even with bad credit. Keep in mind, taking out a personal loan will also impact your credit score.

Home equity loan

If you own a home, you can borrow against it with a home-equity loan or a home equity line of credit (HELOC). The loan is a fixed sum with a fixed interest rate. A HELOC is a credit line borrowers can tap into up to a certain point, and they have variable interest rates. Interest rates will be lower than those of credit cards. But again, there will be a hit to your credit score. More importantly, if you can’t pay off the debt, you could lose your home in foreclosure.

The bottom line

Balance transfers are not magic wands. They will not make the debt disappear. Nor can they force you to change the spending habits that allowed the debt to accumulate in the first place. When deciding whether to apply for a new card with a balance transfer offer, consider what spending patterns you are able or willing to change. If you think you are a good candidate, and you get approved for a balance transfer, make a debt repayment plan and then go for it.