If you’re drowning in credit card debt, balance transfer credit cards present an appealing offer. You can move your debt to a new credit card and pay no interest for a period, and sometimes with no balance transfer fee.
But if you’re not careful, doing a balance transfer can damage your credit score, at least temporarily. Keep reading to learn how a balance transfer credit card can affect your credit score and how to avoid the worst of it.
How much you owe is the second most influential factor in your credit score, and your credit utilization is a big part of that calculation. Your credit utilization is calculated by dividing a credit card’s balance by its credit limit.
So, if you have a $4,000 balance on a card with a $16,000 credit limit, your credit utilization is 25 percent. A lot of experts recommend keeping your credit utilization below 30 percent, but the lower, the better.
Also, keep in mind that there are two credit utilization calculations: One for each card and one for all of your cards combined.
Now, if your balance transfer results in a higher utilization on the new card than what you had on your other card, it could negatively impact your score.
For example, let’s say you have the same $4,000 balance and $16,000 credit limit as the scenario above. If the balance transfer card you get approved for has an $8,000 balance, moving your money over would increase your credit utilization to 50 percent, potentially knocking some points off your credit score.
That said, as you pay down the balance, your score will go back up fairly quickly. Also, it likely won’t matter if you don’t plan on borrowing anytime soon since you won’t be using your credit score for anything.
Opening a new card
Every time you apply for a credit card—or any type of credit for that matter—you get a hard inquiry on your credit score. Each hard inquiry typically knocks a few points off your score.
This effect is usually only temporary, but it can be compounded if you apply for a lot of credit cards or loans in a short period.
So, before you apply for a balance transfer credit card, check your credit score through a credit monitoring service like Credit Karma or Capital One and make sure your credit score is good enough. Most major balance transfer credit cards require that you have at least good credit, which is typically a 700 FICO score or above.
If you’re not there yet, take steps to improve your credit, so you don’t get stuck with a hard inquiry and a denied application.
Closing your old card
If you plan to close your old card once you complete the transfer, think again. Canceling it would eliminate its available credit. Since credit utilization is also calculated across all your cards, if you have high balances on other cards, getting rid of available credit on one could increase your credit utilization.
For example, let’s say you have three credit cards, including your new balance transfer credit card, and you’ve already made the transfer from Card A to Card B:
- Card A: $0 balance, $16,000 limit
- Card B: $4,000 balance, $8,000 limit
- Card C: $0 balance, $500 limit
For individual credit utilization, Card B has a 50 percent utilization rate, and the other two have a 0 percent rate. Across all cards, your utilization is roughly 16 percent. Because one card has a high utilization rate but all cards combined have a low rate, your credit score might not take as big a hit.
But let’s say you move your balance from Card A to Card B and cancel card A. Now your utilization rate on Card B is still 50 percent, but your utilization rate across all your cards is 47 percent. Because both utilization rates are now high, your credit score could take an even bigger hit.
Keeping an old card open doesn’t just help with your utilization. It can also help boost your average age of accounts over time, which impacts your length of credit history.
So, instead of closing the old card, consider keeping it open and putting a small recurring charge on it—say, your Netflix or Spotify subscription—to keep it active. Be sure to set up automatic payments from your checking account to avoid a late payment.
There are, however, a couple of exceptions to this advice. For example, don’t force yourself to keep an old credit card open if it poses a temptation to rack up debt again.
Also, if the card charges an annual fee and you don’t plan on using it ever again, the cost likely isn’t worth the credit benefits, especially if you’re actively paying down your debt.
Our top Balance Transfer pick
If the math works out in your favor, start comparing balance transfer cards to find the one that works best for your needs. Here’s one of our favorites.