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Do balance transfers hurt your credit score?

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Young couple work on finances at kitchen table
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A balance transfer offers the chance to really tackle debt. Instead of paying double-digit interest rates on debt on one or more credit cards, a balance transfer credit card offer allows you to move what you owe onto a new credit card that charges no or very low interest for a year or more.

A balance transfer can be a huge help in the long term if you plan responsibly, giving you a chance to dig yourself out of debt. On the flip side, a balance transfer can ding your credit score slightly in the short term. However, increasing your available credit with a new balance transfer card could end up improving your credit utilization ratio and, consequently, your credit score in the long run.

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. 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. To quickly determine this percentage for yourself, check out Bankrate’s credit utilization ratio calculator.

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 overall. That lower utilization is going to help your credit score increase.

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 to your wallet, 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 length of your credit history 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.

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.

Is a balance transfer a good idea?

A balance transfer should make paying down debt easier, not harder. If you are transferring debts to a new balance transfer credit card with the intention of adding even more debt to it by charging the card regularly, a balance transfer card is not a good idea. Without any interest charges accruing during the introductory 0 percent APR period (usually between 12 and 21 months), you will be able to pay down debt faster and with less effort. Every payment goes toward your principal balance as long as you take full advantage of the 0 percent APR period.

Balance transfers make a lot of sense for consumers who have a lot of high interest debt to pay down. However, keep in mind balance transfer fees of 3 percent to 5 percent apply to most balance transfer cards. Using the example mentioned previously, if you are transferring a balance of $7000, a 3 percent fee would cost you $210.

Assuming you pay down your balance during your 0 percent APR period, a 3 percent fee is nothing compared to the amount you could be accumulating in interest, otherwise.

Tips for how to rebuild credit after a balance transfer

Adding a new credit card can temporarily 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 and prevent interest accruing. In time, you may also earn back your grace period.

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’re a good candidate and you get approved for a balance transfer, make a debt repayment plan and then go for it.

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