A balance transfer can be a good way to pay down credit card debt. Depending on several factors, though, balance transfers can help or hurt a credit score, as well. Someone with excellent credit (a score of more than 740) may qualify for some of the best balance-transfer cards. Those with scores not as high may still qualify for good deals—but may need to do extra research.
For example, initially applying for several different cards with low introductory rates can negatively affect credit. Fifteen percent of a credit score is based on the length of time a consumer's credit accounts have been open: The longer the accounts have been open, the better the score. Opening several new accounts brings down the average age of all credit accounts, hurting a score.
To minimize the negative effect on a credit score, do research and only apply for one card.
- Fifteen percent of a credit score is based on the length of time a consumer's credit accounts have been open.
- To minimize the negative effect on a credit score, do research and only apply for one card.
- Money saved on interest with a balance transfer can help pay down a balance and shrink overall debt faster.
Balance Transfers Offer a Chance to Improve Credit
Does a balance transfer affect a credit score? A new card can be an effective step toward improving a debt situation, but it also comes with new adjustments to a score. Despite any negative effects, though, a new card should initially help decrease credit utilization, a positive factor for a credit score.
Money saved on interest with a balance transfer can help shrink overall debt faster. Lowering the amount of outstanding debt is always good for credit: Amounts owed account for some 30% of a credit score. Paying a credit card bill on time every month can also boost credit, as payment history has the most significant impact (constituting some 35%) of a credit score. Other factors to be aware of include age and mix of credit, and a number of credit inquiries.
After transferring a balance to a new card, consider keeping the old account open. Closing an account can negatively affect a credit score, and keeping existing accounts open can keep the average account age high and lower the credit utilization. Just be careful not to let the extra available credit trigger more spending.
Credit utilization accounts for approximately 30% of an overall credit score; new credit availability from any type of card will increase a credit allowance and lower a consumer's credit utilization ratio. A card used for balance transfers will also have this effect. The amount of credit allowance offered by the issuer of the balance-transfer card will determine how much a credit score improves. The higher the amount available, the more improvement possible.
A good rule is to keep a credit utilization ratio below 30% at all times—both on a per-card basis and across all of a consumer's cards. So someone may want to make a balance transfer worth only 30% of their new credit availability. (Typically, balance transfers will lower the interest one must pay on outstanding debt and free up credit availability on cards that balances are transferred from.)
It can be best to find a card with a credit limit much higher than the amount a consumer looks to transfer. Immediately exhausting the credit limit on a new card can harm a score under certain circumstances.
Initially applying for several different cards that have low introductory rates can negatively affect credit.
Avoid Bad Credit Habits
After transferring a balance, it's important that a cardholder assesses how they accumulated the high balance in the first place. Review past statements and evaluate where the money was spent. Someone might have relied on credit availability or just lived beyond their means without considering the consequences in interest and fees.
Steps to take going forward might include establishing a new or stricter budget or making drastic changes to get on track for better debt management. A credit counselor can also help.
The Bottom Line
Balance transfer cards are a great debt-management tool, but be cautious when exploring new balance-transfer card options. Overall, it's best to use a new balance-transfer card to its fullest advantages and take immediate steps to assess how to avoid the need for more of such cards in the future. Make timely payments on the new card, and perhaps keep the old card(s) open for long-term improvement to the credit utilization and average credit age.