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A balance transfer can be a great tactic to manage debt, but it can affect your credit score when it changes your credit utilization rate, the average age of accounts or the number of inquiries on your credit report. In general, if a balance transfer helps you get out of debt more quickly—and you don't add to the debt while you're paying it off—your credit likely will improve over time.
A balance transfer credit card allows you to move existing debts to a new account, one that may offer a promotional annual percentage rate (APR) period as low as 0%. Debt from multiple sources are consolidated into one monthly payment, to be paid down interest-free over 12, 15 or 18 months depending on the card.
Here's what you need to know about how a balance transfer affects your credit.
Would a Balance Transfer Hurt My Credit?
When you apply for a balance transfer credit card, a hard inquiry will appear on your credit report. A hard inquiry is when a potential lender, such as a credit card issuer, checks your credit to assess whether you're likely to make payments as agreed. A soft inquiry caused by checking your own credit or by lenders looking to preapprove you for an offer does not affect your credit scores.
If the lender decides you present too great a risk, your application will be denied. Multiple hard inquiries could demonstrate to a lender that you're seeking credit from too many sources and that you may not be a responsible borrower. Hard inquiries stay on your credit report for about two years, but they don't impact your credit score as much as your payment history or total outstanding debt does.
As with any new line of credit, opening a balance transfer credit card could negatively affect your credit by lowering the average age of your accounts. Lenders value long credit histories because experienced borrowers are more likely to use their credit appropriately. While opening a new account could temporarily cause a dip in your score, the benefits of strategically using a balance transfer card to pay off debt will generally outweigh it. To be safe, avoid closing older accounts around the time you open a new one so you're not doubly affected.
Would a Balance Transfer Improve My Credit?
Moving multiple debts to a single balance transfer credit card could decrease your overall credit utilization rate, or percentage of available credit you're using. The lower your credit utilization, the better, because a low rate shows lenders you're not racking up debt that you can't repay. Experts recommend keeping your credit utilization below 30% at all times, which means using no more than 30% of your credit limit at any point.
If you have multiple credit accounts but move their balances to a single account through a balance transfer, your previous accounts' utilization rates will appear as 0% on your credit report. That could lower your average utilization, which accounts for 30% of your FICO® Score☉ , the score most commonly used by lenders.
Some credit scoring models may calculate credit utilization based on individual credit cards. If that's the case, your new balance transfer card may have a high utilization rate, since it now incorporates all the balances you transferred from previous accounts. That could have a negative effect on your utilization rate.
In general, however, the goal of getting a balance transfer card is to make it possible to pay off debt. If you take advantage of your 0% APR period and use your interest savings to pay down the balance, your credit utilization will decrease over time. That will have the biggest impact on your credit score, along with making all your debt payments on time.
What to Do After a Balance Transfer
Moving your balances to one credit card will make it easier to keep track of your debt and make payments on time. Avoiding late payments is perhaps the most important thing you can do to strengthen your credit.
To make sure you've got a strong footing when paying off debt, there are other steps you can take once a balance transfer is complete. Follow these guidelines to keep your credit strong:
- Avoid closing old credit cards. To keep the average age of your accounts as high as possible, it's generally best to keep old, unused accounts open—especially your oldest account. If an account has a high annual fee that you're unable to afford, weigh the benefits of closing it against the drawbacks. In some cases, closing it may be the best move.
- Avoid applying for new credit. Limit the number of hard inquiries on your credit report and only apply for new credit—including loans—when you absolutely need to.
- Avoid making purchases with your balance transfer card. The best use of a balance transfer credit card is to pay off debt. Adding to that debt could make it more difficult to get rid of the balance before your promotional 0% APR offer ends. After the promotional APR period ends, your APR will jump—and if interest accrues on an outstanding balance, you could negate any savings the promotional period provided.
- Set up autopay. Make all your monthly payments on time to protect your credit score, as credit score calculations generally weight your payment history quite heavily. You can set up automatic payments from your checking account to your credit card for a specific amount each month. Ideally, it should be enough to allow you to pay off the total balance within the 0% APR period.
- Create a budget. To avoid accruing additional debt, make a budget and regularly track your spending. Get clear on your take-home pay, and how much of it goes toward necessities, luxuries and savings. The process of building a budget can be a helpful exercise in itself; it can help you notice recurring expenses, like a gym membership, that you don't use and can safely cancel to quickly save money.
- Pay down debt. Calculate how much you'll need to put toward your credit card payment each month to get out of debt, and stick to it. Look for ways to stay motivated, perhaps by treating yourself to small rewards at certain milestones, or checking in regularly with a friend who's also trying to get out of debt. You can share frustrations and triumphs and inspire each other to keep going.
The Bottom Line
A balance transfer credit card may negatively impact your credit in the short term. But if used appropriately, it can be part of a strategy to improve your score overall. Make sure to create a debt payoff plan, and follow through on it, so you take advantage of the interest savings a balance transfer provides. Then you'll not only experience the credit score benefits of debt freedom, but also the peace of mind it brings.