Does a Balance Transfer Affect Credit Score?
Harrison Pierce is a writer and a digital nomad, specializing in personal finance with a focus on credit cards. He is a graduate of the University of North Carolina at Chapel Hill with a major in sociology and is currently traveling the world.
At a Glance
A balance transfer can affect your credit score, but it is not always a negative. You should be aware of certain conditions to make sure doing a balance transfer helps rather than hurts your score. For instance, if you transfer existing debt from a high-interest card to one with a lower rate, the amount of money you save on interest could result in an improved score due to payment history and credit utilization.
You will also want to pay attention to any fees associated with balance transfers, as these will impact your overall financial health. Being informed and making mindful decisions based on that information can help ensure that doing a balance transfer benefits your credit rating in the long run.
In this article, you’ll learn:
What is a balance transfer?
A balance transfer is a way to move debt from one credit card to another to take advantage of a lower interest rate or other promotional offers. This can help to save money on interest charges and make it easier to pay off the debt. Typically, there is a fee associated with a balance transfer, such as a percentage of the amount transferred. It’s essential to read the terms and conditions carefully before initiating a balance transfer to ensure you understand any fees or limitations that may apply.
What can you use a balance transfer for?
A balance transfer can move debt from one or more high-interest credit cards to a card with a lower interest rate. This can help to save money on interest charges and make it easier to pay off the debt. Additionally, some credit card issuers offer promotional balance transfer offers, such as a 0% interest rate for a certain period, that can provide additional savings. Some people also use balance transfers to consolidate multiple credit card balances into one account to make managing their debt more manageable.
1. Credit Cards
Some credit card companies allow cardholders to transfer outstanding balances from one or more high-interest credit cards to a card with a lower interest rate. To use a credit card for a balance transfer, you need a credit card account with a balance transfer feature and an outstanding balance on a high-interest credit card you would like to transfer.
First, you should contact your credit card company and request a balance transfer. You will need to provide the account number and the balance of the credit card that you wish to transfer the balance from. Once the balance transfer is approved, the credit card company will pay off the outstanding balance on the high-interest credit card and transfer it to your credit card account with a lower interest rate.
Your credit card company may charge a balance transfer fee, typically a percentage of the amount transferred. Be sure to review the terms and conditions of the balance transfer offer to understand any fees or other costs associated with the transfer. Once the transfer is completed, it’s essential to pay off the transferred balance as soon as possible, as you will still be charged interest on the balance, even if it’s at a lower rate than your previous card, unless you are taking advantage of a promotional offer.
Also, make sure to continue to make payments on your old account, as some companies still charge interest and late fees on the old account until it’s paid off. You can also use automatic payments to ensure you pay your balance on time and avoid late fees and interest charges.
Related: How to Transfer Credit Card Balance
2. Personal loans
A balance transfer using a personal loan works similarly to using a credit card for a balance transfer. Instead of transferring the balance from one credit card to another, you take out a personal loan and use the loan proceeds to pay off the outstanding balances on your high-interest credit cards.
Make sure you shop around for a personal loan with a lower interest rate than the rate on your credit card(s). Once you find a lender and get approved, you will receive the loan proceeds, which you can use to pay off the outstanding balances on your high-interest credit cards.
Pay off the loan as quickly as possible to cut down on interest. Some lenders may require you to close the credit card accounts that you paid off with the personal loan, so be sure to check the terms and conditions of the loan before accepting it. Keep in mind that personal loans often have different terms and conditions than credit cards, so be sure to read the fine print and understand the terms and conditions of the loan before accepting it.
It’s important to note that using a personal loan for a balance transfer can be beneficial if the interest rate on the personal loan is lower than the interest rate on the credit card. However, it’s essential to remember that personal loans typically have a fixed repayment period, so making sure you can afford the payments before taking out the loan is vital.
Learn more: Personal Loan Balance Transfer
How do balance transfers hurt your credit?
Balance transfers can potentially hurt your credit in a few ways. First, applying for a new credit card and initiating a balance transfer can result in a hard inquiry on your credit report, which can temporarily lower your credit score. Additionally, if you cannot pay off the transferred balance within the promotional period or miss a payment, the high interest rate will kick in, and you may end up with even more debt than before.
Furthermore, maxing out a credit card, even with transferred balances, can lower your credit utilization ratio, which is a key factor in determining your credit score. Lastly, if you have too many credit inquiries or new credit accounts, it can also affect your credit score negatively. It’s important to remember that balance transfers are not a solution to underlying financial problems and should be used with caution.
1. New hard credit inquiry
A balance transfer itself typically does not require a new hard credit inquiry, as the credit card issuer is already aware of your credit history. However, if you apply for a new credit card to complete your balance transfer, you will have a hard inquiry.
A hard inquiry can have a small, negative impact on your credit score. Still, it typically has a short-term effect and is not a significant factor in determining your overall creditworthiness. The benefits of a balance transfer, such as a lower interest rate on your debt usually outweigh the impact of a hard inquiry.
Learn more: Hard Credit Inquiries
2. Change in length of credit history
A balance transfer does not typically change the length of your credit history. The length of your credit history is determined by the age of your oldest account and the average age of all your accounts. When you do a balance transfer, you are moving debt from one credit account to another, so the age of the account you are transferring the balance from and the account you are transferring it to will remain the same.
It’s worth noting that closing the account you transferred the balance from could shorten your credit history, as it would remove that account from calculating the average age of all your accounts.
3. Can lead to additional debt
Balance transfers can lead to additional debt if the individual does not plan to pay off the transferred debt within the promotional period. Many credit card companies offer a promotional period during which no interest is charged on the transferred balance. However, once the promotional period ends, the interest rate on the remaining balance can be pretty high. If the individual does not pay off the transferred balance before the end of the promotional period, they will begin accruing interest on the remaining balance, which can lead to additional debt. Additionally, many people may use a balance transfer to spend more on their credit card, thinking they have more credit available. As a result, they end up in more debt.
How can balance transfers help credit scores?
Balance transfers can potentially help credit scores in a few ways. First, transferring high-interest credit card debt to a card with a lower interest rate can make it easier to pay off the debt and ultimately improve your credit utilization ratio. This is a key factor in determining your credit score, and a lower utilization ratio can help boost your score.
Additionally, if you can pay off the transferred balance within the promotional period, it can demonstrate to creditors that you can manage your debt and make payments on time, which can also have a positive impact on your credit score. Also, If you are using a balance transfer to consolidate multiple credit card balances into one account, it can help simplify your credit situation, making it easier to manage and pay off the debt, which can also be seen as a positive factor by the creditors.
1. Lower credit utilization
Balance transfers can help lower your credit utilization by allowing you to move high-interest credit card debt to a card with a lower interest rate. This can help you pay off your debt more quickly and at a lower cost. When you transfer a balance to a card with a lower interest rate, you’ll be able to put more of your payments toward paying down the principal of your debt rather than just paying interest charges.
Additionally, by transferring a balance to a card with a lower interest rate, you can reduce your overall credit utilization ratio, which is the amount of credit you use compared to the amount of credit you have available. This is because the total credit limit of the card you transfer the balance to will be higher than that of the card you’re transferring the balance from. This can help to improve your credit score.
It’s essential to consider the fees associated with balance transfers, such as balance transfer fees, before deciding to do so. Additionally, you should also have a plan to pay off your debt within the promotional period, as once it ends, the interest rate will likely go up.
Related: How to Lower Your Credit Utilization Ratio?
2. Fewer accounts with balances
Having fewer accounts with balances can help your credit score in a few ways:
- Payment history: Having fewer accounts with balances can make it easier to keep track of payments and make sure they’re paid on time. Late payments can harm your credit score.
- Credit age: Having fewer accounts can also help increase the age of your credit history. A longer credit history can have a positive impact on your credit score.
- Types of credit: Having a mix of credit types (revolving credit and installment credit) is also considered positively by credit scoring models. Having fewer accounts may mean having less variety in types of credit and can negatively impact your score.
Is balance transfer a good idea?
A balance transfer can be a good idea to pay off high-interest credit card debt. By transferring the balance to a card with a lower interest rate, you can save money on interest charges and pay off the debt faster. However, it is important to be aware of any balance transfer fees and to make sure you can pay off the debt before the promotional rate expires. Additionally, it is important to keep in mind that the process of transferring a balance may have a temporary negative effect on your credit score. It is always a good idea to consult a financial advisor before deciding.
Balance transfer tips
Here are a few tips for making the most of a balance transfer:
- Compare offers: Look for credit cards with the lowest interest rate and the longest promotional period.
- Read the fine print: Understand any balance transfer fees, as well as the terms and conditions of the promotional rate.
- Pay on time: Pay at least the minimum payment by the due date to avoid late fees and maintain the promotional rate.
- Pay off the debt before the promotional rate expires: The interest rate will typically increase after the promotional period, so it is important to pay off the debt before.
- Avoid new debt: Once you’ve transferred a balance, try not to use the card for new purchases, as this can make it harder to pay off the debt.
- Watch out for credit score: Be aware that balance transfer can have a temporary negative impact on your credit score.
- Create a plan to pay off the debt: It is important to create a plan for how you will pay off the debt and stick to it.
It is recommended to consult with a financial advisor to get the most accurate advice for your specific case.
You should not do a balance transfer if you cannot pay off the transferred balance before the promotional period ends, as you will likely be charged a high interest rate. Additionally, if the balance transfer fee is higher than the interest you would have paid on your current credit card, it may not be worth it to do the transfer. Furthermore, if you have a poor credit score, you may not be approved for the balance transfer credit card, and it is better to work on improving your credit score before applying for a balance transfer.
The number of times you can do a balance transfer will vary depending on the credit card issuer and their policies. Some credit card issuers may limit the number of balance transfers you can make in a certain period, such as within a year. Others may not limit the number of balance transfers you can make.
Applying for multiple balance transfers in a short period can negatively impact your credit score, resulting in multiple hard inquiries on your credit report. Additionally, doing multiple balance transfers can indicate that you are struggling to pay off your debt, which can negatively impact your credit score.
It’s best to check the terms and conditions of the credit card you are interested in and have the plan to pay off the transferred balance before applying for a balance transfer credit card.
Multiple balance transfers can impact your credit score, depending on how you handle them. If you can pay off the transferred balances in full and on time, it may not significantly impact your credit score. However, if you cannot make the payments on time, or if you transfer a balance and then continue to add new debt, it can negatively impact your credit score.
It’s always best to check your credit score before applying for a balance transfer credit card and to be mindful of the credit score requirements for the card you are interested in. It’s also essential to have a plan in place for paying off the transferred balance and any new debt you may accumulate.
A credit score of 660 or higher is generally considered good for a balance transfer credit card. However, some balance transfer credit cards may require a higher credit score, typically 700 or higher. Some credit cards are specifically designed for people with fair or bad credit and may have lower credit score requirements. It’s always best to check the credit score requirements for the specific card you’re interested in.