Do Balance Transfers Hurt Your Credit?

When you apply for a new credit card to carry out a balance transfer, the credit card issuer may perform a hard credit pull (or inquiry) on your credit report. This brings your credit score down by a few points, although maintaining responsible credit habits helps overcome this drop fairly quickly. Paying off the transferred balance in a timely manner may help improve your credit score, as might the newly added credit limit.

Transferring debt from a high-interest credit card to an existing card with a lower interest rate might be possible if allowed by the latter’s issuer.

• Do Balance Transfers Affect Your Credit Rating?
• Do Balance Transfers to an Existing Credit Card Affect Credit Score?
• Why Did My Credit Score Drop After a Transfer?
• Other Questions You May Have About Balance Transfer Cards

If you’re wondering how balance transfers affect credit scores, know that they can have negative and positive effects. This happens because they might affect three important factors involved in calculating your credit score — the credit utilization ratio, the average length of credit history and any new credit.

Each time you apply for a new credit card, a hard inquiry appears on your credit report. As a result, your credit score will drop a bit when you apply for a balance transfer credit card. If you apply for multiple cards within a short period of time, the drop can be significant. While a hard inquiry stays on your credit report for two years, the impact is generally only felt for six to 12 months. With responsible use of your credit, your credit score will get back on track quickly.

Another way balance transfers may adversely affect your credit score is by bringing down the average length of your credit accounts. This, too, may cause your credit score to drop slightly. In addition, the fewer credit cards you have, the greater the possible impact. However, this drop in your credit score is easy to overcome if you stay on track and repay your debt quickly.

How do balance transfers positively affect your credit score? If you play your cards right, you can reduce the debt you owe, not just in dollar value but also as a percentage of the total credit you have available.

Getting a new credit card adds to your overall available credit limit. This, in turn, helps bring down your credit utilization ratio, or the amount you owe as a percentage of your total available credit. This factor accounts for 30% of your FICO Score.

If you have two credit cards with a combined credit limit of $10,000 and have used $5,000 already, your credit utilization ratio is 50%. This number should ideally be below 30%. If you get a new credit card with a credit limit of $5,000, your total available credit increases to $15,000. As long as you do not add debt to the $5,000 you owe, your credit utilization ratio drops to 30%.

Since a balance transfer card does not charge interest on balance transfers for a predetermined time, all of your payment is reducing your balance. Because of this, if you continue paying the same amount (or more if you're able to) you may be able to pay off your debt much faster. This also brings with it the potential to lower your credit utilization ratio or the total debt you owe.

After carrying out a balance transfer to a new credit card, it’s best to keep the existing card active, especially if it’s a few or more years old. This is because it adds to the average length of your credit history. However, keeping an existing card active only because of this might not be a good idea if it comes with a steep annual fee and you don't foresee using its perks to make up for the cost. If you want to keep the card, but it has an annual fee, contact your card issuer to ask if there is a no-fee version that you can convert it to.

>> More: What Happens When You Transfer a Balance on a Credit Card?

When you transfer a balance from one existing card to another, you don’t apply for new credit. Not applying for new credit ensures that the average age of your credit accounts remains the same. In addition, since you are not getting a new credit card, there is no change in your total available credit. As a result, your credit utilization ratio remains the same. With these three factors remaining the same, you can expect there to be no change in your credit score.

Making timely payments toward the transferred balance, repaying the debt as quickly as possible and not applying for more credit, on the other hand, would have a positive effect on your credit score going forward.

>> More: How to Transfer a Credit Card Balance to Another Card

When you apply for a new credit card, the card’s issuer carries out a hard inquiry on your credit report. This lowers your credit score by a few points, irrespective of whether or not the card provider approves your application. If you apply for another card after being denied the first time around, your credit score will drop by a few more points. This happens every time a lender performs a hard inquiry on your credit report. Hard inquiries stay on your credit report for two years. However, you may be able to get your credit score back to where it was in half that time, or even less.

Your credit score might also drop because your new card brings down the average length of your credit accounts. For example, if you have one credit card that’s four years old and another that you’ve held for five years, the average length of your credit accounts is four and a half years ((4 + 5) / 2). When you add a new card to the mix, the average length drops to three years ((4+5+0) / 3).

While not the norm, some credit agencies look at the per-card credit utilization ratio to calculate credit scores. In such a scenario, a balance transfer can lead to a high credit utilization ratio on the new card, which may minimize the benefit to your credit score. Because of this scenario, consider limiting balance transfers to no more than 30% of the new card's limit if you're concerned more about the impact to your score than eliminating credit card interest charges.

>> More: Pros and Cons of Balance Transfers

Learning the answers to other commonly asked questions about balance transfer cards and how they may affect your credit score will help you in the decision-making process.

Now that you understand how a balance transfer affects your credit score, determine if taking this path is right for you. If you decide to move forward, compare the top balance transfer cards based on parameters such as length of introductory 0% APR periods, annual fees, regular APRs, rewards and added benefits.