Credit Q&A: Does Interest Rate Affect Your Credit Score?

Emily from Ohio has been told that if you pay off a credit card with another credit card that has a lower interest rate, it will lower your credit score.  She wants to know if that is true.

[Related Article: 8 Credit Score Myths Debunked]

In fact, it is not true.  The interest rate you pay on your credit card is not reported to the credit reporting agencies (Equifax, Experian and TransUnion) by the credit card issuer.  As such, the credit bureau score does not take credit card interest rate into consideration when evaluating your credit card activity and calculating the score. Generally speaking, paying down credit card debt will have a positive effect on the credit score.  The exact impact on score will depend on your unique credit card usage trends and your other credit report information.

Typically, paying down (or paying off) the balance from one card with checks or a balance transfer feature from another credit card will not help improve the score substantially as the overall debt is not being reduced, but rather being shifted around.  However, independent of your credit score, this may be a prudent strategy if it allows you to take advantage of lower interest rate charges if you carry a balance.

[Featured Product: Get a free trial credit score]

In the below example, a 2% reduction in interest rate results in a savings of $727 dollars in interest rate paid (holding all else constant and assuming no new charges).

Image: e y e / s e e, via Flickr.com