Do Balance Transfers Affect Your Credit?
Unpack the complex relationship between balance transfers and your credit. Discover the nuanced effects on your financial health and credit standing.
A balance transfer involves moving existing debt from one credit card to another account. This new card often features a lower interest rate, such as a promotional 0% annual percentage rate (APR) for a set period. While the goal is to save on interest and streamline debt repayment, the impact on your credit can be complex.
Impact on Credit Utilization
Credit utilization measures the amount of revolving credit used compared to your total available revolving credit. This ratio is a significant component of credit scores, accounting for approximately 30% of your FICO score and 20-30% for VantageScore models.
A balance transfer can positively influence your credit utilization by potentially increasing your total available credit. When a new balance transfer card is opened, the overall credit limit across all your accounts rises. If you transfer a high balance from an existing card, its utilization drops to zero, which can significantly lower your overall credit utilization ratio.
Conversely, a balance transfer could negatively affect your utilization if the transferred amount consumes a large portion of the new card’s credit limit, leading to high utilization on that specific card. Some credit scoring models consider the utilization on individual accounts, not just the overall ratio. Furthermore, accruing new debt on the old, now empty, credit card can quickly negate any utilization benefits. Keeping your overall credit utilization below 30% helps maintain a favorable credit score.
New Account and Inquiry Effects
Applying for a new balance transfer credit card initiates a “hard inquiry” on your credit report. This occurs when a lender checks your credit history for a new line of credit. A hard inquiry typically causes a small, temporary dip in your credit score.
While a single hard inquiry’s impact is generally minor and short-lived, multiple inquiries in a short timeframe can raise a red flag for lenders. This might suggest an increased risk, potentially leading to a more noticeable score reduction. Opening a new credit account also contributes to an initial, temporary score dip.
New credit activity, including inquiries and recently opened accounts, accounts for approximately 10% of your FICO score. The score typically recovers within a few months, provided you manage your new account responsibly.
Payment History and Account Age
Payment history is the most influential factor in credit scoring, making up about 35% of your FICO score and up to 40% for VantageScore models. Consistently making on-time payments on the new balance transfer card, and all other credit accounts, is important for maintaining and improving your credit score. Even a single payment missed by 30 days or more can significantly damage your credit score and remain on your credit report for seven years.
The age of your credit accounts also plays a role in your credit score, comprising about 15% of your FICO score. When you open a new balance transfer card, it lowers the average age of all your credit accounts, which can cause a temporary, minor dip in your score. This effect is more pronounced if you have a short credit history or only a few existing accounts.
To mitigate this impact, keep older credit accounts open, even if they have a zero balance. These older accounts contribute to a longer average credit history, which is seen favorably by credit scoring models. Closing an old account, especially your oldest one, could shorten your average account age and potentially decrease your score, even if the account was in good standing.