Does Doing Balance Transfers Hurt Your Credit?
Understand the nuanced impact of balance transfers on your credit score, from short-term effects to long-term financial health.
A balance transfer involves moving debt from one credit card to another, often to a new card offering a lower or zero percent introductory annual percentage rate (APR). Its impact on credit scores is not straightforward, depending on how the transfer is managed.
How Balance Transfers Work
A balance transfer facilitates the consolidation of existing credit card debt onto a new credit card account. Once approved, the new issuer pays off outstanding balances. The debt then resides on the new card, often with reduced or no interest.
Most balance transfer offers include an introductory APR period, ranging from 6 to 21 months, during which the interest rate on the transferred balance is lower, often 0%. This period allows paying down debt without high interest. A balance transfer fee, typically 3% to 5% of the transferred amount, is charged. For example, a $5,000 transfer with a 3% fee would incur a $150 charge.
Immediate Credit Score Impacts
Applying for a new credit card to facilitate a balance transfer initiates a hard inquiry on a consumer’s credit report. This causes a small, temporary dip in a credit score. Though a hard inquiry remains on a credit report for up to two years, its impact diminishes within a few months.
Opening a new credit card account also influences the average age of all credit accounts. Credit scoring models favor older accounts. Introducing a new, young account can decrease the overall average age of accounts, causing a slight, short-term reduction in the credit score. These effects resolve as the new account ages and payment history is established.
Ongoing Credit Score Effects
The long-term impact of a balance transfer on a credit score relates to the credit utilization ratio. Moving a high balance to a new card, while keeping the original card open with a zero balance, can significantly lower credit utilization. This improves the overall credit utilization ratio, optimal below 30%, and even better below 10%.
On-time payments are the most important component of a credit score. A balance transfer provides an opportunity to manage debt effectively due to reduced interest, making on-time payments easier. Conversely, missing payments on the new balance transfer card, or any other account, will damage the credit score. Paying down the transferred balance during the promotional period leads to debt reduction and contributes positively to long-term financial health.
Optimizing Balance Transfers for Credit Health
To benefit credit health, develop a clear repayment strategy. Aim to pay off the entire transferred balance before the introductory APR period expires. Calculate the necessary monthly payment to avoid a higher interest rate.
Avoid incurring new debt on either the old credit card or the new balance transfer card. The transfer’s purpose is to consolidate and reduce existing debt, not to free up credit for new spending. Using available credit on the old card can lead to more debt.
Maintaining old credit card accounts, even after transfers, is beneficial. Closing old accounts reduces total available credit and lowers the average age of accounts, negatively affecting the credit score. Making all payments on time, across all credit accounts, is important for a strong credit history. Regularly monitor credit reports for accuracy and progress.