A balance transfer can be a good way to pay down credit card debt. But, depending on several factors, balance transfers can help your credit score or possibly hurt it as well. If you’re someone with 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 several points. If you apply for five different cards, you could lower your credit score by approximately 50 to 100 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, you may want to consider keeping the old account open. Closing an account can negatively affect your credit score. By keeping existing accounts open, your average account age remains high and your credit utilization will likely be lower.
Credit utilization accounts for approximately 30% of an overall credit score. Therefore, new credit availability from any type of card will increase your credit allowance and lower your credit utilization ratio. A card you intend to use for balance transfers will also have this effect. The amount of credit allowance offered to you by the balance transfer card issuer will determine how much your credit score improves. The higher the amount of availability, the more improvement you may see.
If possible, it can be best to find a card with a credit limit much higher than the amount you are looking to transfer. Immediately exhausting the credit limit on a new card can harm your score if the credit rating agency has considerations for cards at or above their limit. 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. Thus, you may only want to make a balance transfer worth 30% of your new credit availability. Typically, balance transfers will lower the interest you must pay on outstanding debt and free up credit availability on cards you are transferring from.
Balance Transfers Provide the Opportunity to Improve Credit
Money you save on interest due to a balance transfer can be used to help pay down your balance and shrink your overall debt faster. Shrinking your outstanding debt owed is always good for your credit. The amounts you owe account for approximately 30% of your credit score. This is measured by your credit utilization ratio.
Paying your credit card bill on time every month can also boost your credit, as payment history has the most significant impact, accounting for approximately 35% of your score. Other factors to be aware of include age of credit, mix of credit, and credit inquiries.
Avoid Bad Credit Habits
After transferring a balance to a new card, it's important to assess how you accumulated the high balance in the first place. You will need to review your past statements and evaluate where the money was spent. Perhaps you have been using credit for a particular category where you can deliberately spend less in the future. In some cases you may be relying on the credit availability for multiple categories or just living far beyond your means without considering the consequences of interest and fees. Evaluating the spending on your past card or cards will help you identify potential steps you can take going forward. Establishing a new or stricter budget can be a good first step. You may also find that you need to make drastic changes in order to get on track for better debt management. Seeking a credit counselor can also help. Counselors can provide you with options and avenues that you may not have previously known about which may be able to provide aid in multiple ways.
The Bottom Line
Balance transfer cards are a great debt management tool. However, when exploring new balance transfer card options be cautious. Your score may allow you to get approved for one or two but applying for multiple cards at once will add marks to your inquiries.
Obtaining a new card can be a very exciting step for improving your debt situation but it also comes with new adjustments to your score. New cards lower your age of credit and affect your mix of credit. Despite any derogatory affects though, your new card should initially help to decrease your credit utilization which is a positive factor for your credit score.
Overall, it is best to use your new balance transfer card to its fullest advantages and take immediate steps to assess how to avoid the need for more balance transfer cards in the future. Make sure you make the new payments on time since payments are also crucial for your score. If you keep your old card(s) open, it can help your credit utilization level and average card age over the longer term. Also, keep in mind the lower interest rate from a balance transfer is saving you money that can be put toward paying your balances down. In the long run, you want the balance transfer card to improve your credit score and help decrease your outstanding debt.