Can Balance Transfers Hurt Your Credit?
Understand the comprehensive ways a balance transfer can influence your credit score, from initial actions to ongoing financial habits.
A balance transfer involves moving outstanding debt from one credit card to another, typically to a new card offering a lower interest rate, often a promotional 0% annual percentage rate (APR) for a set period. This strategy aims to help consumers save money on interest charges and manage debt more efficiently. Many individuals wonder about the impact of such a financial maneuver on their credit standing.
Understanding Credit Score Factors
Credit scores, such as those from FICO and VantageScore, are numerical representations predicting a consumer’s credit behavior and likelihood of repaying debt on time. These scores are calculated using information from credit reports compiled by credit bureaus like Experian, TransUnion, and Equifax. While scoring models may vary slightly in their weighting, several components consistently influence these scores.
Payment history is the most significant factor, accounting for approximately 35% of a FICO score, reflecting consistent on-time payments. The amounts owed, often expressed as a credit utilization ratio, represents about 30% of a FICO score. This ratio compares outstanding debt to available credit, with lower utilization indicating better credit health.
The length of credit history contributes around 15% to a FICO score, considering the age of the oldest account, the newest account, and the average age of all accounts. A longer history of responsible credit use is viewed favorably. New credit, including recent applications and newly opened accounts, accounts for 10% of the score. Finally, the credit mix, or the variety of credit types such as revolving accounts (credit cards) and installment loans (mortgages, auto loans), makes up the remaining 10%.
Initial Credit Reporting Events
When a consumer applies for a new balance transfer credit card, a hard inquiry is placed on their credit report. This occurs as the potential lender reviews the individual’s creditworthiness. A hard inquiry can cause a small, temporary decrease in a credit score, usually by fewer than five points.
While a hard inquiry remains on a credit report for up to two years, its effect on the credit score diminishes after a few months and ceases to impact the score after one year. Multiple hard inquiries within a short timeframe can be perceived as a higher risk by lenders, impacting the score more significantly. Additionally, opening a new credit account, even for a balance transfer, can lower the average age of all existing credit accounts. This reduction in average account age can lead to a slight, temporary dip in the credit score, particularly for individuals with a limited credit history.
Credit Utilization and Balance Transfers
Credit utilization ratio is calculated by dividing total outstanding balances across all revolving credit accounts by their total credit limits. This ratio is a significant factor in credit scoring, with a lower percentage being more favorable. A balance transfer can directly influence this ratio.
When debt is moved from an existing credit card to a new balance transfer card, the balance on the old card decreases, often to zero, while the new card’s balance increases. If the new card provides an additional line of credit, the total available credit across all accounts can increase. This increase in total available credit, combined with the consolidation of debt, can lead to a lower overall credit utilization ratio, which may positively influence credit scores.
However, balance transfer fees, typically ranging from 3% to 5% of the transferred amount, are added to the new balance, increasing the total amount owed. While the overall utilization might improve, the new card itself will have a high utilization ratio. Some credit scoring models consider utilization on individual accounts, not just the overall ratio, which could still show a high utilization on the new card.
Payment Behavior and New Credit
After completing a balance transfer, a consumer’s ongoing payment behavior impacts their credit score. Making timely payments on the new balance transfer card is important, especially during any promotional low or 0% APR period. Missing payments can lead to late fees, negate introductory rate benefits, and cause a substantial negative impact on credit scores. A single missed payment can trigger a penalty APR, ending the promotional rate prematurely.
Managing new credit accumulation post-transfer is important. Avoid running up new balances on old credit cards paid down by the transfer. New purchases on the balance transfer card require caution, as the promotional APR may only apply to the transferred balance and not to new spending, leading to unexpected interest charges. Accumulating new debt on either card can counteract the balance transfer benefits, increasing overall debt and negatively affecting credit scores. Repeatedly opening new credit cards solely for balance transfers is detrimental, resulting in multiple hard inquiries and a continually lower average age of accounts.