How Transferring a Balance Affects Your Credit Score

Thinking of taking advantage of a balance transfer offer? It can be an excellent way to pay off your debt. But how will transferring a balance affect your credit score? And of what potential pitfalls should you be aware?

It’s impossible to predict exactly how any one financial decision will affect your credit score. We can guess based on what we know about credit-scoring algorithms, and credit score simulators are can show you how a particular choice might affect your score. But so many factors influence your score that an exact effect is difficult to predict.

With that said, we can look at two areas of your credit score a balance transfer will most likely impact: your credit utilization and new credit inquiries.

Balance Transfers & Your Debt-to-Credit Ratio

Your credit utilization, or debt-to-credit ratio, is the second most important piece of your credit score, behind your payment history. It’s essentially a measure of how much you owe versus how much credit you have available.

Say, for instance, you owe $1,000 on a card with a $2,000 limit. In this case, your debt-to-credit ratio is 50%. (You can see how your debt is impacting your credit by viewing two of your scores for free on Credit.com.)

If you’re approved for a new credit card with a balance transfer offer, you’ll wind up with a higher overall credit limit. This could be a good thing, since it will push your debt-to-credit ratio lower.

In the above example, if you’re approved for a new card with a $1,000 limit, your total credit limit will be $3,000. As long as you don’t accrue more debt, your total debt-to-credit ratio will be about 33%. Since that’s better than 50%, your credit score should be fine. Plus, with a lower interest rate, you can presumably pay off the debt quicker. As your debt decreases, so will your debt-to-credit ratio, which means your credit score will climb.

What About New Credit Inquiries?

A balance transfer’s effect on your credit score isn’t all good. To open a new credit card, the card issuer will pull your credit score, which will most likely add an inquiry to your credit file and cause a small but temporary decrease in your score. The impact won’t likely be large unless you apply for several balance transfer cards at once.

The Possible Pitfalls of Balance Transfers

A balance transfer card can be good in some circumstances, but it has potential drawbacks. Here’s what to avoid if you opt for a balance transfer:

Taking on More Debt

If you’re already dealing with credit card debt because of your spending habits, a balance transfer may be the wrong choice. Opening a new credit card gives you access to more credit, and with that access can come the temptation to spend. If you’re likely to reach your credit limits, a balance transfer card may not be for you.

Paying Too Much in Balance Transfer Fees

Most balance transfer cards come with a one-time fee. This fee may be worth it if it gets you out of paying loads of interest every month. But it might also cost more than you’re willing to pay. Be sure you know what the fee is upfront.

Maxing Out a Credit Card

Scoring algorithms like FICO’s look at both your overall credit utilization and your per-card credit utilization. So maxing out a balance transfer card to take full advantage of a low- or no-interest offer may negatively affect your credit score, even if opening the new card decreases your overall debt-to-credit ratio.

Should You Transfer a Balance?

Is a balance transfer right for you? If transferring a balance helps you save money and pay off debt faster, it’s most likely the right choice. Just be careful if you’re preparing to apply for a larger loan, like a mortgage. Even a small ding at the wrong time can hurt you. Still, transferring a balance and efficiently paying off debt will have great consequences for your credit score over the long term.

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