A:

Transferring a credit card balance can hurt your credit score in the short term, but the extent to which transferring balances hurts your credit score depends on the amount of the balance that you transfer and the new card’s credit limit. In the long term, however, you may see your credit scores go up if you transfer balances strategically to cards with large credit limits.

Why Transfer Balances?

Credit card companies entice consumers to transfer balances with attractive offers such as 0% interest for 12 months. Transferring balances means that a consumer moves debt from one credit card to the zero-interest card, which can lower the person’s credit card bill, but only temporarily if he or she fails to completely pay off the debt during the introductory interest-rate period. Transferring a balance does not cancel the interest and charges already added to the balance, but it does stop additional interest and charges from incurring.

Taking advantage of a credit card’s introductory offer usually saves the cardholder some money. For example, a consumer with a credit card balance of $10,000 at 15% interest, planning to pay the card off in one year, might save around $831 by transferring a balance to a card with a zero-interest offer. However, such credit cards charge balance transfer fees of as much as 3% of the amount being transferred, which shaves off some of the amount saved in interest.

FICO’s Response

Consumers transferring balances to new credit cards should consider their credit-utilization ratio as part of the decision-making process. FICO determines credit scores by assessing the credit utilization ratio. The ratio compares consumers’ total available credit to the amount they owe in order to determine their credit scores. Here is how credit-utilization works when it comes to credit-card balance transfers.

Example: A person with $10,000 in available credit on Credit Card #1 has $3,000 in charges on the card. On this card, he has used up about 33% of the available credit; FICO considers 30% utilization to be ideal. Say the person gets a 0% interest offer on balance transfers on Credit Card #2, and that card has a limit of $12,000. Moving his $3,000 balance to the new card frees up Credit Card #1 completely and only eats up 25% of Credit Card #2, thus dropping his credit utilization to below 30%. Therefore, while his credit score might decrease temporarily because of the inquiry made as part of the application for Credit Card #2, overall, his credit score will most likely increase.

Debt Refinance Alternative

Credit card users wanting to transfer balances with minimal effect on their credit scores might consider personal bank loans. FICO calculates credit scores based on revolving credit, so a bank loan does not figure into the credit utilization ratio. Consumers should be aware, however, that banks almost never offer zero-interest personal loans, but the interest rate offered is usually lower than credit card interest rates.

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