A balance transfer credit card is a useful tool in eliminating your credit card debt. Taking advantage of a 0% APR introductory offer helps you avoid high interest rates while you are paying down your credit card debt.
Before taking advantage of any balance transfer offers, you should do your research to determine if a balance transfer is right for you. When reviewing all of the factors, one consideration your might not think about is the effect obtaining a new credit card can have on your credit score.
A balance transfer does not affect your credit score directly and is not listed on your credit report. Credit scoring agencies do not consider balance transfers when calculating your score. However, a balance transfer can make changes to your financial profile, which in turn can affect your credit score.
To determine if a balance transfer card will negatively – or positively – impact your credit score, you need to understand how your credit score is calculated. You can then evaluate whether a balance transfer is the right option for you.
How your credit score is calculated
A credit score is a statistical number used to determine your creditworthiness based on your credit history. Lenders use credit scores to evaluate the likelihood you will repay your debts on time. Your credit score is typically based on five factors and the percentage they make up your score:
- Payment history (35%) – Tracks if you made payments on time. Missing payments negatively affects your credit score. Payment history is the biggest impact on your credit score as it makes up 35% of your score.
- Credit utilization rate (35%) – Compares your total balances to your total credit limits. A higher credit utilization can result in a lower credit score. Each time you open a new line of creditCredit scoring companies calculate utilization for each credit line individually as well for all of combined. Keeping your credit usage below 30% is advised.
- Credit history (15%) – Calculates the length of your credit accounts and the age of your oldest account.A longer credit history usually translates into a higher score. However, when you open a new credit account, the average credit age decreases, which could affect your score. Credit history is 15% of your score.
- Credit Inquiries (10%) – Every time you apply for a new credit card, a “hard inquiry” is placed on your credit report. Applying for too many credit cards can indicate to lenders you are a higher credit risk and have a small but negative impact on your score.
How a balance transfer impacts your credit score
The components of your credit score most affected by a balance transfer are:
- Credit card utilization: higher individual card utilization after balance transfer.
- Length of credit history: shorter average account age due to recent account opening.
- Hard inquiry: typically only a five-point loss
If you decide to complete a balance transfer, your credit score may lower initially because you will be decreasing your average account age and increasing your credit utilization. However, paying down your debt and using credit responsibly in the future should mitigate the impact.
The key to improving your credit score is to use the transfer to reduce your debt — both in dollar terms and as a percentage of your available credit. Eliminating debt sends the kind of signals that result in better credit scores.
How to Lessen Impact of Balance Transfers on Credit Score
- Check your credit score – Most 0% APR balance transfer cards require good to excellent credit. If you credit score doesn’t meet the standards, you might not get approved for the 0% APR promotional offer or for the amount you need. Review you credit score to see your current score before selecting a card. Most credit card issuers offer free credit scores.
- Make a plan – Figure out how much you need to pay each month to pay off your balance before the 0% APR introductory period ends. If you can’t pay off the debt in the specified timeframe, you will have to pay a high interest rate (could be as high as 25%) on the remaining balance.
- Decide transfer amount – A balance transfer can be for either a full or partial amount. To determine the amount you can transfer, identify the amount you can afford to pay each month and multiply by the number of months the 0% APR introductory offer will apply.
- Compare offers – With so many different balance transfer cards available, you should determine the cards you are eligible for and compare how much you can save on each by reviewing the introductory offer period, fee, terms and conditions.
- Keep original credit card account open – Your credit utilization ratio goes up when you close a card. Assuming the card does not charge an annual fee, keeping the account open will prevent any impact to your credit score.
- Don’t use your card for new purchases – Although the card may come with a promotional 0% APR offer on purchases, you will be adding to the debt you are trying eliminate. If there isn’t a promotional offer, a grace period on interest will not apply since your card has a balance from the transfer and interest will accrue immediately.
- Avoid opening new credit cards – A hard inquiry appears on your credit report for each new credit card you open and can temporarily lower your score. Opening a new card can also reduce the overall length of your credit history. Too many inquiries and new accounts can give lenders the impression you are struggling financially and may not be able to repay your debt.
- Pay attention to credit limits. Your new balance transfer card’s limit will expand your overall available credit and reduce your credit utilization. Depending your debt amount, the credit limit balance transfer limits will prevent you from transferring all of your debt, even if you are approved. Check the limit before making the balance transfer.
- Don’t miss a payment – Paying your credit card bill on time every month will also boost your credit score. Most issuers penalize cardholders for late or missed payments. Not only will your introductory offer will be cancelled and purchase APR will be applied to the remaining balance, your credit score will take a hit.
The key to lowering your credit score is eliminating your debt. When you finally pay off your credit card debt using a balance transfer, the total amounts owed with lower and raise your credit score.