TPG reader credit card question: Do balance transfers hurt your credit score?
Editor’s note: This article is part of a column to answer your toughest credit card questions. If you would like to ask us a question, tweet us at @thepointsguy, message us on Facebook or email us at info@thepointsguy.com.
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. TPG Reader Hildy wants to know if she'll be penalized for using a balance transfer to pay off debt...
[pullquote source="TPG READER HILDY"]I pay my credit card balances in full every month and have not paid a monthly interest charge in many years. But I have taken advantage of 0% transfer offers by paying the transfer fee right away, and then paying a particular amount every month. The amount I pay each month is considerably more than the minimum payment due. So consequently I do have an outstanding balance (at 0% interest) for several months. Does that lower my credit score?[/pullquote]
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While Hildy mentioned that she's not currently in credit card debt, balance transfers can be a great strategy for paying off debt. Instead of watching your interest charges grow each month, you can open a card with an introductory 0% 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.
Related: The best balance transfer credit cards
So will leveraging a balance transfer hurt your credit score in the long run? Remember, five factors are used to calculate your credit score: Payment history, amount of debt (credit utilization ratio), length of credit history, new credit (recent inquiries) and credit mix. Let's take a look at them one by one to see what impact a balance transfer would have.
Related: TPG's 10 commandments of credit cards
Payment history is by far the most important factor in your credit score, affecting 35% of your credit score. In the way Hildy described, a balance transfer therefore would not affect your score. Since she is making more than the minimum payment on her card each month, her payment history would stay strong even though she's not paying off her entire balance at the end of the month.
However, the credit utilization ratio is a bit trickier. 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 Hildy had, which should help her utilization ratio go down. The only problem is that having a high ratio on a single card after the balance transfer might be problematic. But overall, I wouldn't expect a significant impact to her credit score in this category.
As the name suggests, length of credit history will depend on the rest of her credit history. If she has dozens of cards that have been opened for many years each, opening one new balance transfer card shouldn't impact her score. If, on the other hand, she has a short credit history and only a couple of cards, opening a new one could cause her average age of accounts to plummet, adversely affecting her score.
Anytime you apply for a new credit card, you can expect a roughly 5-point hit to your credit score from the new inquiry. Therefore, Hildy should be prepared for her score to decrease slightly if she's opening a new card for balance transfers.
Last but not least is credit mix -- a category that's unlikely to change much if she opens a new card.
Related: 6 things to do to improve your credit score
Bottom line
As long as Hildy keeps making at least the minimum payment each month, she won't be penalized for using balance transfers to pay off a large balance. Over time, her utilization ratio will drop as she pays down the balance. As long as she doesn't open too many new accounts in a short window, this sounds like a solid strategy.
Related: TPG reader question: Does it hurt to pay off your card balance before the billing cycle ends?
Additional reporting by Stella Shon.