Many factors go into your credit score, including your payment history, your ratio of debt to available credit, and the age of your various debts. But what about balance transfers? A balance transfer can streamline and reduce your payments. But how much will a balance transfer affect your credit score? Here we’ll explain how a balance transfer can impact credit scores.
What are balance transfers?
A balance transfer is a way of shifting the debt you owe one or more creditors to a new credit card. You’re transferring the debt from one account to another. If you have several credit cards with smaller balances, transferring them all to one card can make it easier to make payments on time by reducing the number of overall payments.
When reviewing credit card offers, you’ll want to find a card with a low annual percentage rate (APR). That means you can get out of debt faster and may pay less interest if you focus on paying down your debt. If you qualify for a credit card that gives you 12 months or more of a much lower interest rate on the balance transfers you make, you can save significantly on interest payments if you can pay off the balance during the promotional period.
How do balance transfers affect your credit score?
Opening any new line of credit could impact your credit score in many ways. Consider a few of the most common factors impacting your credit report with a new balance transfer credit line.
Expanding available credit.
If a balance transfer increases your overall available credit, then it could improve your credit score. For example, if you have three credit cards with a total available credit limit of $20,000, and you add a new credit card with a $10,000 credit limit, you’ve added substantial available credit. That means the amount of credit available compared to the amount of debt has improved – typically referred to as a credit utilization rate.
Having more available credit can boost your credit score because it’s a signal to lenders that you can manage greater amounts of debt, but only if you use it wisely. Let’s say you transfer $1,500 to the new credit card because it offers a low APR. However, then you spend an additional $1,500 again on the original card, doubling your debt. In this case, your credit utilization rate has changed again and may harm your score.
Typically, you’ll want to target using no more than 30% of your available credit limit. In an ideal situation, with $3,000 in total credit limits, you should only have $1,000 worth of debt. In general, this will help you maintain positive marks on your credit. However, this isn’t a hard rule. If you expect to be opening a new line of credit to buy a home, a car, or something else, then prioritize maximizing your score. However, if you need to finance a larger purchase and pay it over time and don’t anticipate opening new credit in the short term, then you can be less concerned about a short-term impact on your credit score caused by utilizing your available credit when you need it.
Receiving a hard inquiry on your credit report.
One way a balance transfer could immediately impact your credit score is the hard inquiry added to your credit report when you apply for new credit. This is a notation that allows other lenders to know you’re looking for credit. The impact of hard inquiries is often short-lived; most will fall off your credit report in two years.
One way to mitigate the impacts of a hard inquiry is to ensure that you only apply for the credit you need and offers you want. If you’re only exploring possibilities, seek out an offer that only requires a soft inquiry, which means they offer to provide you with insight into whether you’ll qualify for the loan without pulling a formal credit report. If they pre-approve you for the loan, you’ll still require a hard inquiry to complete the application, but a soft inquiry alone will not impact your score.
Too many hard inquiries in a short time could negatively impact your credit score. The key is to review your opportunities before applying and only apply for necessary credit. This approach will help you minimize the number of applications you submit to lenders.
The age of your accounts.
Credit bureaus consider your credit history a useful portrait of your loan risk for lenders. If you have a long history of credit, it shows you’re reliable and responsible. If you don’t have a very long history, opening another credit card could shorten the average age of your credit usage, which could negatively impact your score.
Additionally, you may want to keep your existing card(s) open even if you transfer all your balances to the new low-rate card. Even if your prior cards have zero balance, the age of those accounts still matters. If closing the cards would lower the average age of your accounts, then you’ll want to consider the pros and cons of closing the card vs. keeping it. For example, one pro of keeping the card open is that it positively impacts the average age of your accounts and your overall available credit. However, if the card has annual fees or you’re worried about overspending and running up debt, it may be in your best interest to close the account.
Helping you pay down debt.
You could boost your credit score over the long term if you use balance transfer credit cards to your benefit. One of the best ways to do this is to transfer high-interest-rate debt during a promotional period and then pay off that debt.
This can help you in several ways:
- Transferring the debt to a lower interest rate can reduce your interest payments, saving money and making it easier to put more toward your debt each month.
- By not using the other credit cards you’ve cleared, you have expanded your available credit without increasing your debt.
- You can pay off your debt within the promotional period and gradually boost your credit score by lowering debt and making positive additions to your overall credit history.
- If it’s hard to meet payment obligations due to high monthly payments, consolidating could ease the burden, helping you ensure on-time payments that could improve your credit score.
Used to your advantage, balance transfer credit cards can help you get out of debt and improve your credit score. Remember that transferring the balance to another card and only making the minimum payments will limit how much you can benefit. Take advantage of the chance to make a significant dent in your debt by paying down your principal balance while your rate is at its lowest.
Do your research before choosing a balance transfer card. In addition to lower APRs, some lenders will provide you with different offers that could help you pay down debt even faster, such as:
- Low APR for a period of time, usually 12-18 months, minimizing your interest charges during that time
- Zero balance transfer fees
- No annual fees
Understanding what happens to the transferred balance is important if you don’t pay it off in full within that initial period. Sometimes, deferred interest charges are added to the credit card after an introductory APR period on any debt you haven’t paid off. In other cases, the APR on the remaining balance after the promotional period will become much higher. Again, be sure to read the terms.
Additional considerations for balance transfers.
There’s more to consider about balance transfers before applying. Remember that every lender is different, and it’s up to you to determine which offer is the best balance transfer credit card for your needs. Here are some common questions to consider.
Is there a minimum credit score required to do a balance transfer?
Lenders can set the minimum credit score they expect consumers to have when applying for a balance transfer. Typically, lenders use balance transfers as an incentive to attract well-qualified customers and balance transfers tend not to be the best fit for those struggling with debt or credit.
If you’re unsure if you’ll qualify, contact a lender and ask about a soft inquiry. If you’re unsure, find a credit card company that may work better for you.
Individuals with a more serious need for debt relief may consider talking to a certified debt counselor to explore their debt management and relief options.
How often can you do a balance transfer?
You may make as many and as frequent of transfers as individual lenders allow. However, remember that applying for multiple lines of credit in a short time period may hurt your credit score.
Do you have a budget in place for paying down the balance?
While paying off a balance on one credit card with a balance transfer can be great for your credit score, it can be tempting to use that newly available credit again, which will add to your overall debt. Having a plan for controlling your spending while paying down the transferred balance will provide you the most benefit when using a balance transfer.
Consider all the credit score pros and cons before a balance transfer.
Used wisely, credit card balance transfers could help you save money, make debt easier to repay, and get out of debt faster, which can help you improve your credit score in the long term. Do you believe you can pay down your existing debt and restrict your use of the new credit line so you don’t spend beyond your means? If so, balance transfers could work for you. Learn more about how to use credit (and credit scores) to your advantage on the OnPoint blog.