A balance transfer can be a good way to pay down credit card debt. But, depending on several factors, balance transfers can either help your credit score or hurt it. If you’re someone with the excellent credit (a score above 740), you may qualify for some of the best available balance transfer cards. If your score isn't that high, you may still qualify for some good deals—but you may need to do some extra research.
By initially applying for several different cards with low introductory rates, you can negatively affect your credit. Fifteen percent of your credit score is based on the length of time your credit accounts have been open. The longer you have your accounts, the better your score. By opening several new accounts, you bring down the average age of all your credit accounts, thereby hurting your credit.
Every time you apply for credit, a hard inquiry is made on your credit report. Each hard inquiry has the potential to lower your score by 35 points. If you apply for five different cards, you could lower your credit score by up to 175 points. To keep the negative effect on your credit at minimum through the application process, do your research and only apply for one card.
After transferring a balance to a new card, keep the old account open. Closing an account can negatively affect your credit score. By keeping existing accounts open, your average account age remains high.
Your new balance transfer card’s limit will increase your overall available credit, which can reduce your credit utilization ratio if you tend to revolve balances on other cards. Keep in mind that you will not know the balance transfer card’s credit limit until you receive it from the issuer. If the transferring balance exceeds the new card’s limit, your best strategy going forward will depend on the old card’s limit.
If possible, find a card with a credit limit much higher than the amount you need to transfer. Exhausting your credit limit increases your credit utilization ratio (your debt as a percentage of your available funds), which accounts for 30% of your score. Conversely, if you increase the amount of credit available to you, the money owed becomes a smaller percentage of the whole—you are less "maxed out"—and your credit utilization ratio goes down. A good rule of thumb is to keep your credit utilization ratio below 30% at all times—both on a per-card basis and across all of your cards.
Balance Transfers Provide the Opportunity to Improve Credit
Money you save on interest due to a balance transfer can be used to pay down your balance and shrink your overall debt faster—and shrinking your debt is good for your credit. The amounts you owe accounts for 30% of your FICO credit score, and the dollar amount of your debt is a factor there. Another factor is your credit utilization ratio, or the percentage of your available credit that you’re using.
Paying your credit card bill on time every month can also boost your credit, as payment history accounts for a significant impact on your scores. And when you finally pay off that debt, your amounts owed will fall, which may also positively impact your credit.
Avoid Bad Credit Habits
After transferring your balance to the new card, it's important to take stock of how you ended up in the position needing to transfer the balance in the first place. It's important to evaluate your spending habits. Think about how you can avoid a repeat scenario. Did the availability of credit encourage you to live beyond your means? It's important to establish a strict budget or perhaps seek the help of a credit counselor.
The Bottom Line
The balance transfer is one of the best tools available to save on interest costs over the short term. But opening multiple new cards and spending heavily on your old cards while your transferred balance doesn’t get paid off during a low-rate promotional period is a recipe for credit score disaster.
In the long run, balance transfers can improve your credit score if the transfer makes it easier and faster to pay down your outstanding debt. Of course, you will make those payments on time—a crucial part of maintaining a good credit score; doing so will burnish your credit history, too.