Does a Balance Transfer Close Your Credit Card?

A balance transfer involves moving debt from one or more existing credit accounts to a new credit card, typically one offering a lower interest rate. This strategy is often used to consolidate debt and reduce interest charges, particularly when a new card provides a promotional period with a 0% introductory Annual Percentage Rate (APR). The primary goal of such a transfer is to make debt repayment more manageable by ensuring a larger portion of payments goes towards the principal balance rather than accumulating interest.

The Fate of Your Original Credit Card After a Balance Transfer

The original credit card account typically remains open and active after a balance transfer, unless the cardholder specifically requests its closure. While the debt is shifted to the new card, the original account’s status as an open line of credit generally persists. The credit limit on the original card usually remains the same.

Maintaining the original card as an open account allows for its continued usability for new purchases. However, it is important to manage this card responsibly, especially if any small balances or new charges remain after the transfer. Payments on any residual debt on the original card must continue to be made to avoid late fees and negative impacts on credit.

Deciding to keep the original card open can offer advantages related to credit health, such as maintaining a longer credit history and a higher total available credit. Conversely, closing the original account could potentially shorten the average age of credit accounts and reduce overall available credit, which might negatively influence a credit score.

The Role of Your New Balance Transfer Credit Card

The credit card to which a balance is transferred serves a specific purpose in debt management. Upon approval, the transferred balance appears on this new card, centralizing the debt. Balance transfer cards are frequently characterized by an introductory APR period, often as low as 0%, which can last anywhere from six to 21 months. This interest-free period allows cardholders to make significant progress on the principal balance.

A balance transfer typically incurs a one-time fee, which is usually a percentage of the transferred amount. These balance transfer fees commonly range from 3% to 5% of the total balance, or a flat fee of $5 to $10, whichever is greater. This fee is added to the transferred balance on the new card.

It is crucial to understand that while the transferred balance may benefit from a low or 0% introductory APR, new purchases and cash advances made on the balance transfer card usually incur interest at the card’s standard, higher APR. This standard rate applies even during the introductory period for the transferred balance. Cardholders must carefully review the terms and conditions of the new card, paying close attention to minimum payment requirements and the APR that will apply to any remaining balance once the introductory period expires.

Credit Score Considerations with Balance Transfers

Initiating a balance transfer can have several effects on a consumer’s credit score, both immediate and long-term. When applying for a new balance transfer credit card, a “hard inquiry” is typically recorded on the credit report. This hard inquiry can result in a small, temporary dip in the credit score, usually by a few points, though its impact generally fades within a few months. Multiple hard inquiries in a short period can have a more pronounced negative effect.

Opening a new credit account also impacts the average age of accounts within a credit profile. A new account with a “zero” age can lower the overall average age of all credit accounts, which is a factor in credit scoring models. The length of credit history contributes approximately 15% to a FICO Score, so this temporary reduction can cause a slight, short-term decrease in the score.

However, a balance transfer can positively influence credit utilization, a significant factor in credit scoring. By consolidating debt from a high-utilization card to a new one, especially if the original card’s balance becomes zero or very low, the credit utilization ratio improves. A lower credit utilization ratio, ideally below 30% on individual cards and overall, is generally viewed favorably by credit scoring models. Furthermore, keeping the original credit card open and active after the transfer, even with a zero balance, can contribute to a longer credit history and a higher total available credit, which supports a healthy credit profile over time.