Eliminating debt can be a gargantuan task. When you’re stuck with high balances and high interest rates, the debt repayment process can seem like a constant struggle.
Luckily, you have options. If you’re struggling to pay off your credit card balances, a balance transfer can help. Balance transfer credit cards allow you to transfer and consolidate your existing credit card balances onto a single card, which often makes it easier to manage payments. Plus, most balance transfer cards offer introductory 0 percent APR periods. The best balance transfer credit cards offer intro APR periods that last between 12 and 18 months, giving you a year or more to pay off your balance interest-free.
Do balance transfers affect your credit score? If handled responsibly, a balance transfer is more likely to help your credit than hurt it. However, there are a few ways in which a balance transfer could negatively impact your credit score.
Let’s take a look at how balance transfers can hurt your credit as well as how they can help it. We’ll also explain how you can use your new balance transfer card to pay off your debt and improve your credit score at the same time. That way, you’ll be better prepared to answer the question “Should I transfer my credit card balances?”
What factors are considered in your credit report?
Your credit report tracks a number of credit-related factors, such as whether or not you regularly make on-time payments on your debt. Credit scoring companies like FICO and VantageScore use these factors to determine your creditworthiness and assign you a three-digit credit score.
Some components of your credit report, such as your personal identifying information, have no effect on your credit score. Here are the five factors included in your credit report that impact your FICO credit score:
How a balance transfer can hurt your credit
Do balance transfers hurt your credit? It depends. Transferring a balance to a new credit card has no effect on your credit score. However, what you do after a balance transfer can end up impacting your credit score for the worse. Here are three ways in which a balance transfer credit card could lower your credit score:
A hard inquiry on your credit
When you apply for a new line of credit, the lender conducts a hard credit inquiry (often called a “hard pull”) on your credit report. Each hard credit inquiry can lower your credit score by a few points, though a hard pull is unlikely to reduce your score by more than 10 points total.
In most cases, you don’t need to worry about how credit inquiries affect your credit score—but if you’re on the cusp between fair credit and good credit, it might be worth considering whether a credit inquiry will keep you from reaching the next level.
Increasing credit utilization ratio
Your credit utilization ratio, which represents your current debt versus your available credit, makes up 30 percent of your FICO credit score. It’s a good idea to keep your credit card balances between 10 and 30 percent of your available credit. This means that if you have $10,000 in available credit, your total credit card balances should never exceed $3,000.
When you open a balance transfer card, you’re giving yourself a new line of available credit. That’s good for your credit utilization rate and your credit score. However, if you close your old credit cards after transferring their balances, your available credit will decrease. That’s bad for your credit score.
Leaving your old credit cards open is a smarter move, but only if you can keep from adding new debt to those cards. That new debt could also increase your credit utilization ratio and lower your credit score.
Shortening your credit history
Your length of credit history accounts for 15 percent of your FICO credit score. Credit issuers like to see that you can successfully maintain a credit account over a long period of time. This means that if you cancel your old credit cards after completing a balance transfer, you might eventually lose some of the credit history you’ve built up over the years. (Keep in mind that accounts in good standing remain on your credit report for 10 years after you cancel them.) This could lower your credit score, so try to keep those old credit cards open.
Here’s one more tip: If one of your old credit cards charges an annual fee, see if you can downgrade the card to a no annual fee card. That way, you can skip the fee but keep the benefits of your credit history.
How a balance transfer can help your credit
A balance transfer can help your credit in a few different ways. When you open a balance transfer credit card, you increase the amount of available credit under your name and reduce your credit utilization ratio, which is an excellent way to improve your credit score. Your credit utilization will continue to decrease as you steadily pay off your balances, as long as you don’t charge new debt to your credit cards during this time period.
A balance transfer credit card can also help your credit score by consolidating your debt into a single monthly payment. If you have trouble paying your credit card bills on time every month, consolidating those bills into a single payment can help you improve your payment record and boost your credit score.
Is a balance transfer a good idea?
Should you transfer your credit card balances? In many circumstances, a balance transfer can help you pay off old debt and get your finances back on track. However, a balance transfer may not be the best option for you. Here’s what you need to consider before deciding whether a balance transfer is a good idea:
- How long is the balance transfer card’s 0 percent intro APR period? Make sure you’re applying for a balance transfer credit card that gives you enough time to pay off your balances before they start accruing interest.
- How much will you pay in balance transfer fees? The best balance transfer credit cards charge balance transfer fees of 3 percent to 5 percent. That is, between 3 and 5 percent of every balance you transfer. If you’re considering a balance transfer credit card that charges more than 5 percent in fees per transfer, you might want to look for other options.
- How good is your credit? It is possible to do a balance transfer with bad credit, but you might not be approved for the best balance transfer cards on the market. Instead of using a balance transfer credit card with a limited 0 percent intro APR period and high fees, it might be better for you to focus on paying off your existing credit cards—which will also help you build your credit.
If you aren’t eligible for a balance transfer credit card that offers at least 12 months of 0 percent intro APR and no more than 5 percent in balance transfer fees, a balance transfer might not be the best idea. Look for other ways of paying down your credit card balances, such as the snowball method or the avalanche method.
How to do a balance transfer without hurting your credit
Balance transfers have their pros and cons—but if you handle your new balance transfer credit card responsibly, the benefits should come out on top. Here’s how to do a balance transfer without hurting your credit:
- Check your credit score before applying for a balance transfer credit card. Some balance transfer cards are only available to people with good or excellent credit, so make sure you don’t waste a credit inquiry on a card that might not be a good fit for someone with your credit score.
- Have a plan to pay off your transferred balance. A balance transfer calculator can help you decide how much money you need to put toward your balance every month—as well as how much interest you’ll pay if you don’t clear out that balance before the introductory APR period ends.
- Don’t add new debt to your credit cards. You might be tempted to continue using your old credit cards, especially after you transfer their balances to your balance transfer credit card, but that could hurt your credit utilization ratio and lower your credit score. If you do make purchases on your old credit cards, make sure you can pay them off in full every month.
The bottom line
Do balance transfers hurt your credit score? It all depends on how you use them. If you close your old credit cards after transferring their balances, or if you use your balance transfer as an opportunity to run up a bunch of new charges, your credit score could suffer. On the other hand, a well-managed balance transfer is likely to improve your credit over time.
If you want to use your balance transfer credit card to boost your credit score, make regular on-time payments on your card while avoiding new debt. By understanding what goes into your credit report and how a balance transfer credit card can affect your credit score, you’ll be better prepared to use your balance transfer card responsibly and work toward a higher credit score.