Do balance transfers affect your credit score?

Eliminating credit card debt can be a monumental task. And juggling balances on multiple credit cards with high interest rates can make the process even more difficult.

With many balance transfer credit cards, you can pay off your principal balance without paying interest within a year or longer. Transferring the balance will not only help you save money, but will also help you pay off your debt faster.

But getting a balance transfer card and moving your debt around can hurt your credit score, even if only temporarily. Here’s how balance transfers can affect your account and what you can do to restore it.

How a balance transfer can damage your credit history

Almost every time you apply for a new credit account, the lender will make a hard inquiry on one or more of your credit reports. According to myFICO, each new hard request typically lowers your credit score by less than five points. But tough requests can have a bigger impact if your credit history is relatively new, you have few credit accounts, or you’re applying for multiple credit cards in a short period of time.

Also, keep in mind that while complex inquiries stay on your credit reports for two years, they only affect your FICO score for half of that time. So if opening a new account hurts your credit history, it will be temporary.

Your credit history is approximately 15% of your FICO credit score. While not as important as your credit usage and payment history, opening a new account can lower your credit score by lowering the average age of your accounts.

For example, let’s say you have two credit accounts: a student loan you’ve had for five years and a credit card you’ve used for two years. Between them, the average account age is 3.5 years. However, if you open a credit card for balance transfer, the average age drops to 2.33 years because the age of the new account is zero years.

It’s impossible to say exactly how much such a decline will affect your credit score, but it’s still important to know that it can hurt your credit score.

How to make a balance transfer without damaging your credit history

To make a balance transfer and keep your credit intact, follow these simple guidelines:

• Apply only for the card that best suits your needs. It is difficult to know how high a credit limit an issuer will offer you if you are approved for a balance transfer card. While you can’t predict a card’s potential credit limit, you can compare balance transfer cards based on how long they offer 0 percent APR and other factors.
• Avoid transferring balances up to the full credit limit of the new card. If you transfer a balance that either maxes out your new card or gives it a really high usage rate, it could hurt your credit score. According to myFICO, a max card can lower your score by more than 100 points.
• Wait until you build your credit history. If you already have a long credit history — like multiple credit cards or loans that are about three years old or older — a brand new account might not make much of a difference to your score. But if you’re being charged an exorbitant APR on your existing card balance, you might be better off making a balance transfer regardless of your credit history. (Please note that if your credit file is too thin, you may not qualify for a balance transfer card.)

Is rebalancing a good idea?

While a balance transfer credit card can save you money as you pay off your credit card debt, you need to be disciplined to make it happen. If you’re already struggling to make more than the minimum payment, or if your financial situation suddenly gets worse, you may not be making much progress.

It’s important to consider that many balance transfer credit cards offer rewards when you make new purchases, and sometimes this includes a signup bonus to encourage immediate spending.

If you’re prone to overspending, the promise of a reward may tempt you to add more debt to your new card, but it will increase your credit usage and make monthly payments harder.

Moreover, if you make purchases with a new card and are not eligible for the 0% APR promotion, interest may begin to accrue immediately and may offset any benefit you receive from the balance transfer promotion.

As a result, it’s best to avoid adding new debt to the new balance transfer card and original card until you’ve paid off what you owe. However, if you intend to spend just enough to earn the card registration bonus and offset the cost of the card balance transfer fee, it may be worthwhile. But you can also get a card without a balance transfer fee to solve this problem.

It’s better to get a new balance transfer card if you’ve already set a budget and are in control of your spending.

How to create a loan after a balance transfer

Transferring a balance can hurt your credit score in many ways, but in any case, using a credit card responsibly can make recovery easier over time. This means making at least the minimum payment on time every time, and avoiding accumulating balances on any other credit cards you hold.

bottom line

Now you know how a balance transfer can affect your credit. But instead of focusing solely on how your credit score will react, consider how eliminating credit card debt will affect your overall financial health.

In most cases, a temporary hit to your credit score can be worth the long-term benefits of being out of debt.

Ben Luthi is a freelance writer specializing in credit cards and personal finance. He is passionate about helping people find clarity about their finances and take actionable steps to improve their lives.