Can a Balance Transfer Hurt Your Credit?
Want to save money and pay down some debt? You can potentially do this with a balance transfer credit card, which moves your higher-interest debts to a credit card with lower APRs.
Lower-interest cards often have an introductory rate of zero. So the more debt you pay off during the introductory period, the more money you’ll save and the quicker you’ll be on a path to financial freedom. Not only can a balance transfer help you pay down debt and save money by paying less interest, it might also help to boost your credit score.
But a balance transfer isn’t right for everyone, and most card issuers charge a balance transfer fee. Be sure to check the terms & conditions of the card offer for more details. Here are some important factors to consider.
5 things to consider before a balance transfer
Before you transfer your credit card balance, think about the following:
- Credit score. Do you know your credit score? If not, you can use a tool like LendingTree’s free credit monitoring service to check your score. The best balance transfer deals are typically available to those who have a good or excellent credit score. If your score is less than stellar, you may need to find other ways of paying down your debt or work on improving your score before applying for a balance transfer.
- Introductory APR. The introductory APR (annual percentage rate) of 0% is a seductive way of getting you to apply, but make sure you read the fine print first. That introductory APR is only temporary. Some issuers may offer the promotion for up to 15 months. After the introductory period is over, the APR will change to a higher variable APR. For example, the APR may jump to between 15.24% and 26.24% variable. Compare the APRs on the new card to your current APR before deciding to transfer a balance.
- Credit limits. Every lender has its own credit limitations on balance transfers. For example, an issuer may only allow its cardholders to transfer no more than $15,000 within any 30-day period.
- Fees. Banks may charge for conducting balance transfers. For example, an issuer may offer a $0 introductory balance transfer fee for the first 60 days that your account is open. If you transfer debt after that, it could cost you 3% to 5% of how much you are transferring, depending on the credit card terms. Make sure you add these fees into the total cost of the debt you will be paying back. For example: If you are transferring $10,000 and the bank charges a 5% fee, you will actually owe $10,500. Your goal? Find a credit card with zero balance transfer fees.
- How fast you can pay. The idea of using a balance transfer card to successfully pay off a large portion, or all, of your debt before the promotional APR expires is ideal. If you are not sure if you can do that, make sure you can still afford to make payments once the promotional period ends.
When does a balance transfer help your credit?
A balance transfer may boost your credit score by:
- Decreasing your credit utilization ratio. The utilization ratio is the amount of revolving credit you owe divided by your credit limit. “You should only utilize 30% or less of your available credit limit in order to build and maintain a healthy credit score.” said Erin Lowry, author of “Broke Millennial Takes On Investing.” “Lowering your balance owed will decrease your utilization ratio which, in turn, will improve your score.”
- Helping you pay down debt faster. Paying off credit card debt at a higher APR can seemingly take forever. Move it to a card with a lower APR and you’ll have extra money to put toward your debt.
- Bringing a card balance to a zero. Your goal with a balance transfer is to pay off debt, but what do you do with the card you just paid off? Nothing if you want to boost your score, said Edi Flores, an asset coach for New Economics for Women, a not-for-profit organization based out of Los Angeles, Calif. “Closing a card hurts your credit profile because you don’t have as much credit [available],” said Flores. “Leaving the old card open, but making sure you don’t use it, will improve your credit score.”
When can a balance transfer be risky?
While a balance transfer seems like a smart financial move, it might put a few dings on your credit score that you should be aware of:
- New hard credit inquiries. “A balance transfer involves applying for a new credit card and your credit score will drop, but only by a handful of points, when you apply,” said Lowry. “You can rebound quickly with good behaviors — such as paying on time and keeping your utilization low.” However, if your credit score teeters between good and not-so-good, this drop can put you out of the running for a balance transfer. Consider that before applying.
- Closing the old card. “Closing the old card impacts your length of credit history,” which can ding your score, said Lowry. Consider leaving the old card open instead.
- Shuffling debt around. Several balance transfers might sound like a great way to pay down your debt, but creditors may not be happy if it appears that you’re just moving things around and not really paying anything off.
The bottom line
Using a balance transfer card to help pay off higher-interest debts is a smart way to get out of debt faster, if it’s done correctly. Remember to stay current on all payments until your balance transfers have been approved and posted to your new card. Depending on the lender, this can take a few days or several weeks.