How Do Balance Transfers Affect My Credit Score?

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 not be granted initial credit lines sufficient to transfer large balances and may want to ask their existing card issuers to consider lowering rates on any balances not able to be transferred.

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.

In addition, every time a consumer applies for credit, a hard inquiry is also made on their credit report. Each hard inquiry has the potential to lower a score several points.

To minimize the negative effect on a credit score, do your research and only apply for one card. Try to find out if you can qualify for one of the best balance transfer cards currently available. Alternatively, a small personal loan may be better suited for helping you combat your debt.

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 temporary negative score impacts that come from the hard credit inquiry involved when applying for a new card, though, a new card should initially help decrease credit utilization, a positive factor for a credit score. However, bear in mind that when an existing balance is transferred the new credit line could get utilized to an extent that it could lower your credit score. That's because lenders don't like to see credit utilization rise above 30%, ideally.

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: In terms of score weighting factors, 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.

As mentioned, it's 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, especially is a 0% APR introductory rate is offered, 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, but unless you've received a pre-approved offer card issuers generally won't commit to what level of credit line they will extend until you apply and they pull your credit report. Immediately exhausting the credit limit on a new card can harm a score under certain circumstances so it's important to determine your new credit line before deciding how much of your existing balance to transfer.

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.