Are you thinking about transferring your credit card balance? Balance transfers are a money management strategy that can lead to significant savings. By choosing a low annual percentage rate (APR) card with a balance transfer option, you can consolidate your credit card balance and reduce the amount you have to pay in interest.
Before you transfer your balance, however, it’s important to understand the full picture of how your credit signal changes with a balance transfer. Part of that is to understand how balance transfers affect your credit score.
What is a balance transfer and how does it work?
Banks and credit card issuers provide balance transfer options that allow you to transfer your existing credit card debt to a new account. Banks may offer promotional rates, i.e. teaser rates, for a limited period of time, although they are much lower than regular finance charges. Debt from multiple sources can be combined into one monthly payment and can be paid interest-free for 12, 15 and 18 months, depending on the card.
Remember, you can avoid interest on most credit cards by paying your monthly balance in full on time. However, if you already have debt and plan to pay it off, a balance transfer may be one way to strategically reduce interest.
Why balance transfers?
The biggest benefit of balance transfers is the temporary interest-free period. When you use a balance transfer card, all of your monthly payments are credited to your principal balance during the interest-free promotional period, while the amount you’re currently paying can be used up for nearly half of your interest expense.
But there’s a second benefit that most people don’t always consider. Such is the organization.
“People think of balance transfers as a way to organize, consolidate debt and keep credit in one place,” Anderson told Select. “It says.
Regardless of the interest rate on a new balance transfer card, it’s important to take advantage of an interest-free period to avoid having to pay interest on the debt. Plan your monthly payments so that you can pay off the entire balance during the 0% APR period on that balance transfer card.
How do I apply for a balance transfer card?
When you buy a balance transfer card, look at the card’s interest rate after the interest-free period ends, the promotional period, and the fees that may be charged on balance transfers.
Visit, call or search online for a bank or credit union. You can also check the list of available balance transfer offers offered by NextAdvisor. You can often qualify in minutes. If you have a card, you can start transferring to your card account. Balance transfers can take some time, usually up to three weeks. Generally, you cannot transfer balances from one card to another within the same bank group.
The types of debt you can transfer vary from lender to lender. Depending on your card, you can transfer the balance of personal loans, credit cards, student loans, auto loans, and mortgages to a credit limit. Your credit limit is the amount you can use based on your credit application and history.
How can balance transfers hurt your credit?
While performing a balance transfer itself doesn’t hurt your credit score, applying for a new balance transfer card will affect your score. Almost every time you apply for a new credit score, the lender conducts a thorough survey on one or more of your credit reports. According to my FICO, every time you have a new complex inquiry, your credit score usually drops less than five points.
However, complex inquiries can have a greater impact if your credit history is relatively new, you have few credit accounts, or you apply for multiple credit cards in a short period of time. Also, keep in mind that complex issues remain on your credit report for two years, but they affect your FICO score only half the time. So if opening a new account hurts your credit rating, it will be temporary.
Your credit history is about 15% of your FICO credit score. While credit usage and payment history are not that important, opening a new account can lower the average age of your account and cause your credit rating to drop.
For example, suppose you have two credit accounts: a student loan, which you have for five years, and a credit card, which you have for two years. Of those two, the average age of your account is 3.5 years. However, if you open a credit card to transfer the balance, the average age will be lowered to 2.33 because the new account sign-up age is 0 years.
It’s impossible to say exactly how much this reduction will affect your credit rating, but it’s still important to know that a credit check can hurt it.
Here’s how to improve your credit score with balance transfers:
Apply for only one card.
Limit the negative impact on your credit score of complicated inquiries, credit inquiries and new loans by applying for just one card. Do your research first and choose one card that is appropriate for your balance transfers. Preferably choose a card that offers a low introductory fee.
Leave your existing card open.
Average account age and credit score combine both factors in your credit score. By not canceling any card (even if you’ve paid off all your balances through a balance transfer), you can keep those elements of your account intact.
Take advantage of low APRs and introductory interest rates to reduce your debt.
If you actively use balance transfers to pay down debt, you can improve your credit score in the right direction. If you transfer your balance to a card with a low interest rate, you can “pause” the interest charges to identify your balance. If you pay more than the minimum payment to reduce your debt, your credit rating will be higher because of on-time payments and better credit utilization.
Consolidate your debt into a single monthly payment.
Transferring your balance to a single credit card makes it easier to track your debt and pay on time. Preventing delinquency is probably the most important thing you can do to increase your credit.
Credit utilization is down.
If you get a new credit card to transfer your balance, you get an extra credit limit. Transferring a few debts to a new credit card can lower your overall credit utilization ratio or percentage of available credit. The lower your credit utilization rate, the better, because low interest rates show that borrowers are not accumulating debt they can’t repay.
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