Do Balance Transfers Hurt Your Credit?

Among the most common questions that credit card holders ask is, “Do balance transfers hurt my credit?” It makes sense, given that you may be thinking about transferring debt from one provider to another that offers a lower interest rate and/or a 0% introductory APR period.

For those wondering if a balance transfer is a good idea for their household budget and finances, the short answer is that balance transfers aren’t bad, and they typically won’t negatively impact your credit score. In fact, as financial strategies go, you’ll often find a balance transfer to be a practical and wise choice when it comes to reducing your overall debt load and expenses.

At the same time, though, note that applying for a new credit card could in certain circumstances have a potential negative impact on your credit score. Let’s take a closer look at how balance transfers might impact your credit – and what you need to know about them from both a short- and long-term financial planning standpoint.

What Is A Balance Transfer?

If you’re wondering what a balance transfer is, think of it like this: A balance transfer happens when you take the standing balance from one credit card and move it over to another. It’s a frequent occurrence in the world of credit cards, where transferring debt from one card provider to another that offers a lower interest rate can often help you save significantly on costs.

For example, you may be able to cut your monthly payments significantly by taking your existing credit card debt and transferring your balance to a card that offers a 0% introductory APR. It’s a common financial strategy that many households use to reduce recurring payments and stretch their everyday budget further.

How Balance Transfers Can Impact Your Credit

To begin with, note that credit scores – which can be impacted by a wide range of variables such as your payment history, mix of credit facilities, how much you owe, etc. – are fluid in nature. Understanding how they change over time is important, as it helps you get a better sense of how different financial actions positively or negatively impact your score and ability to obtain credit facilities.

Changes Your Overall Payment History

For starters, opening a new line of credit for a balance transfer and routinely paying your bills on time can positively impact your credit score, as it helps you increase and improve your credit history. Essentially, prospective lenders look at your credit score as a snapshot of your creditworthiness that provides a sense of whether or not you’re a safe bet to lend money to. The longer and more well-rounded a history that you have of making timely payments, the more attractive a lending prospect that you’ll be seen as. Conversely, you should be aware that late or missed payments can negatively impact your credit score as well – and be aware of just how long late payments stay on credit reports for. The short answer: roughly 7 years, meaning that it’s best not to apply for credit facilities that you can’t effectively budget for or those that may put your finances in a bind on occasion. On the bright side, if you’re carrying a heavy debt load or high-interest financing, a balance transfer can help you reduce these payments and how much you’ll ultimately owe here.

Lowers Your Credit Utilization

Your credit utilization ratio speaks to how much of your available credit you’re currently using. The lower your credit utilization ratio, the better it is for your credit score, as lenders interpret this to mean that you’re not being forced to lean on credit due to financial constraints or hardships. Should you open a new card to facilitate a balance transfer, that means effectively increasing your access to revolving credit, which in turn means giving you access to more capital. Mathematically, that leads to a lower credit utilization ratio, which can help you improve your overall credit score. Balance transfers are also typically sought after in terms of gaining access to funds at lower interest rates, which can allow you to pay off outstanding balances faster due to lower associated payments. This process can also enhance your credit score by allowing you to improve your credit utilization ratio through eliminating debt more rapidly.

Lowers The Average Age Of Accounts

Be aware that the age of credit accounts also impacts your credit score. Generally, the longer the history of responsible credit usage that you have the better, as it provides reassurance to lenders who are looking to establish that you are a responsible borrower. However, opening and closing accounts could potentially lower the average age of the credit accounts that appear under your name, thereby potentially lowering your credit score.

Triggers New Credit Inquiries

Knowing what a credit inquiry is proves helpful here, too. A credit inquiry essentially occurs when a lender checks your credit, you check your own credit score or you request a copy of your annual credit report. Should you apply for a new credit card or loan, a hard credit inquiry will occur, which is visible to other potential lenders and may have a slight impact in terms of lowering your credit score. Submitting multiple hard inquiries in a short amount of time should be avoided, as it may suggest to lenders that you represent an increased risk to their balance sheet.

Is A Balance Transfer A Good Idea?

It all depends on the financial products available to you and your own individual household budget and financing situation. However, note that a balance transfer is often one of the most popular ways to reduce debt, lower monthly payments and improve your overall credit score.

Benefits Of A Balance Transfer

Signing up for a balance transfer credit card is often recommended, as it provides a way for you to refinance existing credit card debt that previously came with higher interest rates attached. You’ll often recognize a number of benefits from transferring debt to a provider that is willing to consolidate and service it for lower fees.

• Lower interest rates: Doing a balance transfer can help you save significantly on interest rate charges and cut your recurring expenses considerably. If you’re thinking about consolidating credit card debt, consider choosing a balance transfer credit card with a 0% introductory rate. For a set period of time, it will allow you to avoid needing to pay interest-related expenses, and you can put any money sent to your lender toward paying down your principal balance more rapidly instead.
• Smaller monthly payments: Alongside lower interest rate charges come smaller monthly payments, making it easier to account for paying off debt on your everyday household budget. It’s why so many people seek out balance transfer options, especially with credit card APRs now soaring as high as 26% – 30%. Taking out a balance transfer can help you put more money back in your pocket and ultimately save you more cash in the end.
• Credit card debt consolidation: By using a balance transfer card, you can effectively combine multiple higher-interest-rate credit card balances into a single, consolidated account. While other forms of debt consolidation such as loans and cash-out refinances are also available, a balance transfer credit card usually offers promotional savings windows during which you can quickly chip away at outstanding balances.

Drawbacks Of A Balance Transfer

Of course, there are also downsides to completing a balance transfer that you should be aware of. Several of the most common to consider can be found below.

• High balance transfer fees: Signing up to receive a balance transfer can come at an additional expense. For instance, many balance transfer credit cards may charge you a 3% – 5% balance transfer fee on the transaction. For example, if you transfer $10,000, you might be charged $300 – $500 just for switching the balance over. Keep in mind that it’s important to shop around for credit card offers, as different providers present different deals, and these expenses can quickly add up.
• Negative impact on credit: As mentioned before, opening a new line of credit can possibly lower the average age of your accounts, prompt a hard credit inquiry or otherwise negatively impact your credit. Before opening a new credit card, you’ll want to review your credit score and credit history and budget for any impact that doing so may have on your finances.
• Promotional interest rates are time-sensitive: Balance transfer cards generally offer an introductory APR of 0% for a limited-time promotional period, typically around 6 – 18 months. When this promotional period ends, you’ll be charged APR fees on any debt that remains, making it important to factor in any related costs as you consider how to go about best managing your finances.

Tips To Make A Balance Transfer Work For You

To maximize savings and get the most from any balance transfer credit card or plan, you’ll want to keep a number of hints, tips and suggestions in mind as you go.

1. Space out hard inquiries: Ideally, you’ll want to wait around 6 months before applying for a new credit card. Doing so can help you cut down on hard inquiries on your credit, which negatively impact your credit score. Keep in mind that if multiple credit card applications are received in rapid succession, it can be interpreted as a potential red flag by lenders. Likewise, when you get a new credit card, it can reduce the age of your newest account and your overall accounts’ average age, which can also impact your credit score. As a result, it's best to space out new card applications.
2. Aggressively pay down balances: Part of the appeal of balance transfers and supporting credit cards is that they offer low or no interest rate promotional periods. During these times, any money paid to your lender will go directly toward paying off your principal loan balance. As such, it’s best to pay down balances aggressively during these periods, as it can help you slash monthly payments and overall charges on a long-term basis. Doing so often proves a handy way to lower one’s debt and increase your credit score by improving your credit utilization ratio as well.
3. Consider credit limit increases: A credit limit increase won’t just give you more potential revolving credit to draw upon, especially if you’re looking to make the most of a balance transfer credit card’s promotional period. It can also help you influence your credit utilization in a positive way, potentially leading to an enhanced credit score to boot. If you’ve gotten a great deal on a balance transfer credit card, you can often leverage it to help consolidate and pay down a wide range of debt. Just make sure that you’re careful with utilizing your new credit limit, and don’t lean too heavily on debt to finance one-time or recurring purchases.
4. Maintain positive payment history: As when taking on any form of debt, it’s important to make payments in full and in a timely fashion as agreed on with your lender. The longer and more consistent that your payment history is, the better your credit score will be, and the more opportunities there will be to borrow in the future. A long and successful payment history can also help you secure loans and credit cards under better terms, conditions and interest rates as well. Noting this, should you find yourself concerned about potentially missing or being late on a payment, it’s best to be open and transparent with your lender and discuss possible solutions prior to defaulting on monthly charges.

The Bottom Line

Balance transfers can be a handy tool for consolidating debt, cutting interest rate-related fees and slashing both your monthly payments and overall household expenses. But they can also work for or against a cardholder, depending on your financial health and individual spending habits. However you structure your finances, it’s important to map out, implement and maintain a healthy budget to avoid accumulating too much debt.

Need help getting a better handle on managing your bills and monitoring your credit score? Be sure to download the Rocket Money℠ app today, which can help you stay one step ahead of everyday expenses.