Do balance transfers affect your credit score?
Before you open a rewards credit card, it's important to understand how the actions you take today will affect your credit score for years to come. The same holds true if you're in debt and are working to pay it off.
Balance transfers can be a great strategy for paying off debt, either for personal or business use. Instead of watching your interest charges grow each month, you can open a card with an introductory 0% annual percentage rate (APR) offer and transfer your balances to that card. Then you can pay your debt off over the course of 12 to 15 months (depending on the offer) without racking up any additional interest.
However, will leveraging a balance transfer hurt your credit score in the long run?
Related: How to do a balance transfer
What is a balance transfer?
A balance transfer is a type of transaction in which debt is moved from one credit card account to another. If approached correctly, it can save you money on interest payments if you transfer your balance from a high-interest card to a lower-interest card.
For example, debt moved from a credit card accruing interest to a balance transfer credit card with a 0% introductory annual percentage rate could potentially be paid off interest-free.
Keep in mind, though, that balance transfers come with a few costs and limitations. You'll generally have to pay a balance transfer fee, which tends to be 3%-5% of the total amount transferred. Also, your card might have a balance transfer limit, preventing you from moving the entire balance of a card or loan.
Do balance transfers hurt your credit score?
A balance transfer can both positively and negatively affect your credit score.
Five factors are used to calculate your credit score: Payment history, amount of debt (credit utilization ratio), length of credit history, credit mix and new credit (recent inquiries).
Payment history is by far the most important factor here. As long as your payments are made on time, balance transfer or not, your score will generally not be hurt.
The credit utilization ratio is a bit trickier, however. This factor refers to the total amount of debt you owe versus the total credit limits you have from various banks and issuers.
Opening a new card for the purpose of a balance transfer would increase the total amount of credit you have, which should help your utilization ratio go down. Assuming that a balance transfer card is incentivizing you to pay off more than your minimum balance — because of the difference you save in interest — a balance transfer can help your credit score in the long run.
The only problem is that having a high ratio on a single card after a balance transfer might be problematic. Overall, though, don't expect a significant effect on your credit score in this category.
When evaluating credit history, FICO takes three things into account, per its website:
- How long your credit accounts have been open, including the age of your oldest account; the age of your newest account; and an average age of all your accounts.
- How long specific credit accounts have been open.
- How long it has been since the account has been used.
While opening a new card will bring the average age of your accounts down (negatively affecting your credit score), you can work to counteract this by keeping older accounts open and active.
Opening a transfer balance card can also improve your credit mix, which FICO defines as all types of credit you have to your name, including credit cards, retail accounts, installment loans, finance company and mortgage loans. Credit mix only accounts for 10% of your FICO score, however, so don't expect a significant bump.
As for new credit and recent inquiries, note that anytime you apply for a new credit card, you can expect a roughly five-point hit to your credit score from the new hard inquiry. Repeated balance transfers to new cards can hurt your credit due to the new inquiries.
Related: Credit utilization ratio: What is it?
Whether for personal or for business use, balance transfer cards can be a great strategy for paying off debt interest-free. We recommend that you pay off your debt during the 0% APR period. Otherwise, a high-interest variable rate will kick in on the unpaid balance.
If done correctly, they won't affect your credit score too much either way — helping you toward the ultimate goal of operating debt-free and paying off your credit card bills in full each month.