Abalance transfercan help you pay down your credit card debt more quickly. But before you attempt one it's worth considering the potential impact on your credit score. That can be either positive or negative, depending on how you go about it. Here is what you need to know.
Key Takeaways
- Transferring your existing credit card balances to a new card can make it possible to pay your debts down faster and raise your credit score.
- Applying for a new card can have a small and brief negative effect on your credit score, and it's best not to apply for more than one at once.
- Your credit score will also benefit if you don't close the accounts that you transfer balances from.
How Balance Transfers Work
In a balance transfer, you open a new credit card account and transfer all or part of your existing credit card balances to it. Some credit cards are promoted for this purpose and may offer low or even 0% interest rates on balance transfers for a certain period, such as 12 or 18 months. However, these credit cards often charge transfer balance fees, such as 3% to 5% of the amount you transfer.
How Balance Transfers Can Help Your Credit Score
If transferring your credit card balances to a new card makes it easier for you to pay down your debt, that will help your credit score (and save you money in the bargain).
One of the major factors that goes into computing your credit score is your credit utilization ratio. That's how much revolving debt you currently owe as a percentage of the total credit available to you. For example, if you owe a total of $10,000 on your credit cards and their credit lines add up to $20,000, your credit utilization ratio is 50%. In general, lenders favor credit utilization ratios under 30%, and the lower the better. In fact, FICO, the major credit scoring company, recommends keeping it under 10%.
In addition, simply taking on a new credit card can lower your credit utilization ratio. Using the example above, if your new card offers a $10,000 credit line, you would now have $30,000 in total available credit, so your $10,000 in debt now translates into a 33% credit utilization ratio. Then, as you pay down your debt, your credit utilization ratio will decline even further.
How Balance Transfers Can Hurt Your Credit Score
Unfortunately, simply applying for new credit cards can hurt your credit score, although usually in a minor way and only briefly.
When you apply for a new credit card, the card issuer will request your credit report from one or more of the major credit bureaus to see how much you already owe and how you have handled your debts in the past. That is referred to as a hard inquiry, or hard pull, and it can temporarily ding your credit score. (There are also so-called soft inquiries, which will have no effect.)
The negative effect will multiply if you apply for more than one card at roughly the same time. So, for credit score purposes, it makes sense to limit your applications to a single balance transfer card that you believe you will qualify for. You will also want one that has a large enough credit line to absorb all of the debt you are hoping to put on it.
Another way that your credit score might take a hit is if you close the credit accounts that you are transferring balances out of. That's because the average age of your accounts can be another factor in the scoring formula, with older being better. So plan to keep the old accounts open even if you don't use them very much or at all.
After You Transfer Your Balances
Once you've successfully completed the balance transfer, the next step is paying down your debts, ideally before the low- or no-interest promotional period runs out. And, it probably goes without saying, but try to resist the temptation to use more credit and pile on more debt.
How Can You Find a Good Balance Transfer Credit Card?
Many credit card issuers offer balance transfer cards, so it pays to shop around online. Investopedia also publishes a regularly updated list of the best credit cards.
What Credit Score Do You Need to Get a Balance Transfer Credit Card?
You'll usually need a credit score of 670 or better to get a balance transfer card, according to Experian, one of the three major credit bureaus. A higher score may make you eligible for a larger credit line or other benefits.
What Is a Soft Inquiry?
A sort inquiry occurs when a lender or other party looks at your credit report even though you have not applied for credit with them. For example, credit card issuers often review individuals' credit reports as a way to find potential new customers. When you request your credit report yourself, that is also considered a soft inquiry.
How Can You See Your Credit Report?
You can obtain your credit reports from all three major credit bureaus—Equifax, Experian, and TransUnion—at the official website for that purpose, AnnualCreditReport.com. By law, you are entitled to a free credit report from each bureau at least once a year. If you find any information you believe to be in error, you also have a right to dispute it. You can learn more about that process on the website.
How Can You Find Out Your Credit Score?
You may be able to obtain your credit score free of charge from your bank or credit card issuers. There are also reputable websites that offer free credit scores. Note that you probably have a number of credit scores, based on different scoring models, so the one you obtain may not be identical to all the others.
The Bottom Line
Balance transfer cards are a great debt-management tool and can help you raise your credit score if you use them to pay down your account balances. However, bear in mind that applying for too many cards can do some damage to your score, as can closing the old accounts that you are transferring balances from.
