In a NutshellA balance transfer may lead to your scores dipping in the short term. That’s because you’ll decrease your average account age and increase the credit utilization on a single card. But your credit could rise again with careful use.
A balance transfer card can simplify your debt while removing new interest from the equation. It can also affect your credit scores in both good and bad ways.
A new credit card can hurt your credit scores in a couple of ways: The application results in a hard inquiry, which causes your scores to drop by a few points, and the new account drops your average account age, which is one of the many factors that go into calculating your credit scores.
A new credit card can also help your scores in the long run by increasing your available credit and adding another account to your credit profile.
But there’s one thing to keep in mind before you move your debt to a new balance transfer card: It won’t fix any financial habits that led to the debt in the first place. So before you apply and transfer any balances, make sure you have a plan to pay off your debt and prevent yourself from getting into a similar position in the future.
- Balance transfers and your credit scores
- Is a balance transfer a good idea?
- Finding the right balance transfer card
- How to build credit after a balance transfer
Balance transfers and your credit scores
Your credit scores are determined by a variety of factors, and a balance transfer may affect some of those factors. Here are the score components most likely to feel the negative effects of a balance transfer. (Note that there are several different credit-scoring models out there, and each model may weigh credit factors differently.)
- Credit utilization, or how much of your credit you’re using compared to how much you have available (most experts recommend keeping your overall credit utilization below 30%)
- Length of credit history, or how long you’ve had credit lines open
- New credit, when you open new accounts
As you go through the steps involved in completing a balance transfer, your credit may be affected in different ways.
When you apply for the new credit card, the issuer will create a hard inquiry on your reports. This may lower your credit scores by a few points, and the inquiry may stay on your reports for about two years.
If your application is accepted, the new card will lower the average age of your accounts — which can drop your scores by a few points as well.
If you end up with a new card, a balance transfer isn’t necessarily all bad news for your credit. While your credit history takes a dip, your credit utilization may actually improve.
The new card will come with a brand-new credit limit. A higher total credit limit means that your debt will be a smaller percentage of your overall available credit, as long as you don’t continue spending or close any of your existing credit cards. That’s good news for your credit utilization ratio!
One thing to note: Some credit-scoring models calculate your credit utilization ratio on a per-card basis as opposed to looking at your overall debt. If the score you’re looking at focuses on the utilization of each card, your credit may be negatively affected because of how much debt is now entirely on one card.
If you want to get an idea of what your VantageScore 3.0® credit scores from Equifax and TransUnion look like before applying for a balance transfer card, you can do so for free with Credit Karma.
Is a balance transfer good idea?
A balance transfer allows you to move an existing balance from one or more credit cards to a single card — usually one with a low or 0% introductory interest rate. But there are pros and cons to balance transfers.
Your level of debt won’t change, but the main benefit is this: During a 0% interest introductory period, your debt won’t grow with interest charges while you work to get it under control.
The best balance transfer credit cards typically offer a 0% intro annual percentage rate for a specified period, usually 12 to 21 months.
Let’s look at an example of how this works. Say you have the following cards in your wallet:
|Card 1||Card 2||Card 3||Card 4 (your new balance transfer card)|
|APR||24%||18%||20%||0% intro for 12 months, then 15%|
|Age of account||48 months||24 months||36 months||0 months|
You’re motivated, so you want to pay off the balances on Cards 1, 2 and 3 in the next 12 months. Transferring those balances onto Card 4, which has a 0% intro APR for the first 12 months, could save you up to $665 in interest.
Just don’t forget to factor in the balance transfer fee (if there is one) when calculating your net savings. Balance transfer fees are typically 3% of the amount you wish to transfer.
You can use this balance transfer calculator to help you run scenarios to decide if a balance transfer card makes sense for you.
What should I do if I don’t get a high enough credit limit to transfer all my credit card debt?
You may get approved for a balance transfer credit card, only to turn around and find out the credit limit is lower than you’d hoped. In this case, transfer what you can but make a plan for how you’re going to pay down the debt remaining on your high interest cards, in addition to your new balance transfer. If you make regular, on-time payments, you can ask for a higher limit down the road, but it’s up to the issuer to approve the request.
Finding the right balance transfer credit card
There’s no one-size-fits-all balance transfer card. That said, certain cards tend to stand out as good options for a variety of reasons.
Use these questions to help you decide which type of card you may need.
- What kind of credit do you need to get the card? Credit Karma members can check their Approval Odds to get an idea of how likely they are to be approved for some credit cards. Though, ultimately, the credit card company has the final say.
- Will the card allow you to transfer debt from another account or loan issued by the same bank?
- Will the card limit how much you can transfer?
- What’s the length of the introductory APR? Is it enough time for you to pay off the balance and does it fit into your financial plans?
- Is there a time frame in which you’ll need to make the transfer to benefit from the introductory offer?
- Is there a balance transfer fee?
If you’re interested in getting a balance transfer card, here are a couple of picks from Credit Karma’s editors.
- Citi® Double Cash Card: Great for long-term rewards once you pay off your balance
- Citi Simplicity® Card: Great for long intro APR offer
How to build credit after a balance transfer
So, you’ve completed a balance transfer. That’s awesome! But before patting yourself on the back, there’s some work left to do.
As you pay down your debt, consider keeping all your cards open — even the ones you transferred balances from. Keeping your accounts open can help show your positive payment history, boost the average age of your accounts, and maintain a low overall credit utilization (all potentially great for your credit).
Paying your credit card bill on time and in full every month can also boost your credit, as payment history has a significant impact on your scores. And when you finally pay off that debt, your amounts owed will fall, which can also positively impact your credit.
- Do your research to decide if a balance transfer is right for you.
- If you decide a balance transfer card is the right call, shop around for the card that makes the most sense for you.
- If you’re approved for a card, initiate the balance transfer process.
- Pay down your debt aggressively on the balance transfer card to help avoid any of the “gotchas” that can come with these cards. Try not to add to your debt.
- Focus on building your credit with the new card with good credit habits, like making more than the minimum payment and always paying your credit card bill on time.