I just got a new credit card so my credit utilization ratio will go down over time. If I do a balance transfer to get 0% interest, will my credit score lower due to both balances showing up for a few weeks or a month?
When you transfer a balance from one card to another, both lenders will update their account balances accordingly. Depending on when each lender reports the new information to Experian and the other bureaus—TransUnion and Equifax—it's possible that both accounts may reflect the balance for a short period of time, but it likely won't be that way for long. Any potential impact to your credit scores would be resolved as soon as the balance on the older account is updated.
How Will Opening a New Account Affect Me?
As you noted, your balance-to-limit ratio, also known as your credit utilization rate, is an important factor in credit scores. If you have opened a new credit card account, but your overall balance on revolving accounts remains the same, the increase in your total available credit amount can lower your overall utilization rate. The lower your utilization rate, the better for your credit scores.
And while lowering your utilization rate is good for scores, it's possible that applying for and opening a new account can cause a temporary dip, even if you don't transfer a balance. Any time there is a change to your credit history, your credit scores may be affected. There is almost always a combination of factors affecting your scores at any one time. In this case there would be at least two: Opening a brand new account and the balance transfer's impact on your utilization rate.
In this case, when you apply for a new account, the lender will check your credit report, which will be reflected as a hard inquiry in your credit history. A single inquiry will usually have a very minimal negative impact on your scores, if it has one at all. That's because the new inquiry indicates to lenders that you may have opened an account that is not yet reflected on your credit report.
Once the new account is reported and lenders can see that you are making all payments on time and managing the account responsibly, your credit scores should recover.
Should I Close the Old Account Once the Balance Is Zero?
Your utilization rate is an important indicator of risk to lenders, which is why your credit card balances can have such a big impact on scores. To calculate your utilization rate, add up all of your credit card balances and then add up all of your credit limits. Divide the total of all your balances by the total of all your limits and convert to a percentage.
Adding to your total available credit limit by opening an additional credit card account can help your credit scores because it decreases your overall utilization ratio. Keep in mind, however, that closing your old credit card account once you've transferred the balance can have the opposite effect.
When you close a credit card account, you eliminate that account's available credit, which would cause your overall credit utilization to increase and impact your scores. If you are planning to make a major credit purchase in the next three to six months, it's probably best to leave the account open. Closing the account may impact your credit scores for a time, but it still might make sense for you if you are not planning to apply for credit soon.
Thanks for asking.
Jennifer White, Consumer Education Specialist