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Credit cards are a great way to quickly make purchases, track your finances and earn something back when you decide to spend. However, the convenience can make overspending easy; and when balances get out of hand, it’s important to get back to manageable monthly payments. One of the most effective ways to do that is with a balance transfer credit card.

A balance transfer allows you to organize your outstanding balances by moving them all onto one card. The best balance transfer credit cards will come with an introductory 0% APR period, so carrying a large balance is practical during the interest-free window.

While a balance transfer is a common tactic for attacking your debt, there are some drawbacks. There are limits on your transferable balances, fees to consider and it may take some discipline to pay down that large balance before the introductory period is over and the interest rate increases. How you handle your balance transfer can also affect your credit.

Simply moving your debts won’t do much to your credit score, but it’s important to know the impact a balance transfer can have. There are certain repercussions that could affect your score in different ways, but read on to find out how to make a balance transfer card your ticket to a well-managed debt situation and an improved credit score.

How your credit score is measured

Understanding how your credit score is measured will help you make the best decisions when executing a balance transfer. Your score is made up of five categories on your credit report:

  • Payment history
  • Credit utilization
  • Length of credit history
  • Types of credit
  • New credit

Some of these factors may be affected throughout the process of a balance transfer, so let’s go through how to avoid the potential consequences and reap the available benefits.

Prior to filling out an application to start your balance transfer journey, you should know the best balance transfer credit cards require good credit. Most balance transfer cards require a credit score above 670 – in the good to excellent range. However, if your credit isn’t in that range, that doesn’t mean you’re out of luck in the balance transfer department. If you have poor or limited credit, consider a personal loan specifically for people with low credit instead of a balance transfer credit card.

Impact of a balance transfer on credit score

Payment history

By moving high-interest balances and practicing some fiscal responsibility, you can set a trend of on-time payments and cut down on your outstanding debt. Over a period of time, this is how a balance transfer can ultimately help improve your credit score. Also, ridding yourself of debt will give you the financial freedom to improve upon any other credit habits and provide some stress relief.

After you transfer your balance, making proper payments is essential to realize the full benefits. With a good balance transfer card you’ll likely have a generous period to pay off the balance without interest. If you’re able to make the necessary payments, a balance transfer card is well worth it for reducing debt and improving your credit score.

Credit utilization

Your credit utilization ratio is a measure of your balances over your total credit limit and accounts for approximately 30% of your credit score. The lower the percentage is, the better, so the added credit of a new card will be beneficial by dropping this ratio and improving your score.

If you can, search for a balance transfer card with a credit limit above the amount of debt you want to transfer. While getting your unpaid balances into an account with an introductory interest-free period can do wonders for your own organization and save money, immediately exhausting the credit limit on a new account can hurt your credit score.

Length of credit history

Once approved, your new card will immediately lower the average age of your credit accounts. It’s difficult to determine how much of an impact this will have on your credit score, but it’s likely minimal.

However, if after you’ve transferred a balance, you close your unused credit cards, your credit score will definitely take a hit. Especially if it’s an older card. While canceling your old credit card could be the right option depending on your circumstances, consider keeping your card open with minimal activity to avoid dinging your score.

Types of credit

Opening a new balance transfer credit card will improve your credit score by diversifying your mix of credit. This is one of the lesser factors impacting your credit score, but having different types of credit is helpful. By the same token, closing your old credit card after a balance transfer will reduce your mix of credit and lower your score, so it’s best to consider this carefully before canceling your old card.

New credit

When applying for a balance transfer card, the credit issuer will place a hard inquiry on your credit report. Although they’re inevitable when applying for any credit card, these may slightly hurt your score, can stay on your report for up to two years and are created to reflect that you’ve recently applied for new credit. To avoid significant impact, don’t apply for too many cards in a short period of time — multiple inquiries are a red flag to credit issuers.

The bottom line

Depending on your debt situation, you can make a major difference on your finances through a balance transfer. While your credit is not totally immune to the effects of a balance transfer, if done the right way the effect is minimal and you’ll have the opportunity to combat your debt and ultimately improve your credit score.