While balance transfers between existing credit cards typically won’t affect your credit, opening a new account can hurt your credit score. When you open a new account, the average age of your credit history will decrease and your issuer will run a hard credit check, making your credit score fall in the short term. However, you can improve your score over time if you pay down your balance quickly.
What a Balance Transfer Is
A balance transfer lets you move your balance from one credit card to another. They’re beneficial if you want to pay down existing high-interest debts, consolidate your debt onto one card, or access more favorable terms. If you open a balance transfer or 0% APR credit card, you’ll be able to pay off your transfer amount with no interest for an extended period of time. Some cards may even offer low introductory balance transfer fees.
How Balance Transfers Affect Credit Scores
Balance transfers can have both positive and negative effects on your credit score. If you transfer your balance to an existing account, you won’t see a short term impact on your credit. However, if you open a new account, you’re more than likely to damage your credit score. As you pay down your transfer amount, though, you’ll be able to build your score as long as you pay on time.
Balance transfers affect credit scores in two ways:
- Improve your credit: Transfers can improve your credit score when you make on-time payments and pay your debt off quickly. Your payment history makes up 35% of your score. Plus, if you open a new card, you’ll increase your overall available credit limit, which can help lower your credit utilization ratio and improve your credit.
- Damage your credit: If you choose to open a new card, your issuer will likely run a hard credit check and you’ll decrease the average age of your credit history, which can damage your score. Also, if you consolidate multiple cards onto one, you’ll rapidly increase your single-card credit utilization ratio, making your score fall in the near term.
Balance transfers are a useful tool that can help you pay off your debt more quickly and avoid potential interest charges. While it may have a negative impact on your score in the short term, you can improve your score over time as long as you meet your monthly repayment terms.
How Business Balance Transfers Affect Business Credit
The main business credit bureaus consider a range of factors when they calculate your business credit score, including your outstanding balances, credit utilization ratio, length of credit history, and payment history. Business balance transfer credit cards can cause your score to experience short-term negative effects when you transfer a balance. However, paying your bill in a timely manner will help improve your credit in the long term.
Factors That Make Up Your Credit Score
Your credit score measures your creditworthiness and is made up of five factors that help creditors decide whether or not you qualify for a specific product. Learn these factors to help you understand how a balance transfer affects credit scores.
The five factors that make up your credit score are:
- Payment history: If you transfer a balance, it’s crucial to always make on-time or early payments to help improve your credit score. Your payment history makes up 35% of your credit score.
- Credit utilization ratio: Your credit utilization ratio indicates how much of your available credit you’re using and makes up 30% of your credit score. If you open a new balance transfer card, you’ll increase your overall available credit and lower your credit utilization ratio. It’s best to keep your ratio below 30% but greater than 0%.
- Average age of credit: Creditors like to see a long and steady credit history, which shows you have experience managing your credit over time. If you open a new credit card, the average age of your credit will decrease, which can have a negative impact on your credit. The age of your credit makes up 15% of your credit score.
- New credit: Most credit card issuers run a hard credit check when you apply for a new credit card. These hard inquiries can damage your score by up to five points and remain on your report for two years. However, it will only impact your score for one year. New credit inquiries make up 10% of your credit score.
- Credit mix: Creditors like to see borrowers who have a mix of credit, including both revolving and installment accounts. Although applying for a new credit card won’t impact your credit mix, this factor makes up 10% of your credit score.
Any change in your credit card usage and overall credit activity can impact your credit score. It’s vital to keep your credit usage in check and pay your bills on time to avoid hurting your credit score.
What to Do After a Balance Transfer
While a balance transfer may help you save money on interest, it doesn’t reduce the total money you owe. Once a balance transfer is complete, you’ll need to pay down your transfer amount every month until it’s fully repaid.
Use these tips once you’ve transferred a balance:
- Pay down your balance: Make on-time payments every month and pay down your balance as quickly as you can. If you have a card that offers an introductory 0% balance transfer APR, be sure to pay off your entire balance before the promotional period ends.
- Don’t close your old account: Even though you may not be using your old card, you should keep it open to help the average age of your credit history.
- Spend within your means: The idea of a balance transfer is to help create a system to pay down your debt. Remember to only spend what you know you can afford so you don’t take on more debt.
A balance transfer can help you save money while making it easier to pay down existing high-interest debts. However, without self-discipline and spending controls, it won’t keep you from taking on more debt. Always be sure to repay what you borrow in a timely manner.
While a balance transfer may hurt your credit in the short term if you open a new account, it typically won’t impact your score if you use an existing account. However, to save the most money, you should look for new cards that offer more favorable terms, including no-interest financing.