A balance transfer is a form of debt consolidation where you move debt from one credit card to another. In most cases, it means moving debt from an account with a high interest rate to one with a lower interest rate.
Performing a balance transfer can be a good way to get out of credit card debt. However, before committing to this method, you obviously need to know that it’s safe. Do balance transfers come with any risks, and can they hurt your credit?
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Do balance transfers affect your credit score?
Yes, balance transfers can sometimes affect your credit score. Performing a balance transfer involves the following actions, both of which can affect your credit:
- Opening up a new credit card: When people perform balance transfers, they’ll often open a new credit card to do so (instead of simply moving their debts onto an existing card). Opening a new card will affect your credit score.
- Moving a lot of debt onto one card: Whether it’s a new or old card, loading a single credit card up with debt will usually affect your credit rating.
The effects of those actions can be positive or negative. We’ll break this down in detail below.
How balance transfers can hurt your credit
A balance transfer can hurt your credit by doing the following:
- Triggering a hard inquiry: If you open a new credit card for the balance transfer, your card issuer will run a credit check on you known as a hard inquiry. Incurring a hard inquiry will cause your credit score to drop by a few points.
- Lowering the average age of your accounts: Opening a new credit card account for the balance transfer will also reduce the average age of your credit accounts. Because your average credit age is a factor in every major credit scoring model, this can cause a drop in your credit score.
- Using up most of the credit on one card: Your credit score factors in how much of your credit you’re actively using (aka your debt-to-credit ratio). Some scoring models look at each individual card, not just your aggregate credit usage, which means that having a high debt-to-credit ratio on your balance transfer credit card could hurt your credit. 1
How much do these hurt your score?
While all of the above can hurt your credit score, how bad will the damage be? In most cases, the answer is: not that bad.
The negative effects of a balance transfer won’t usually be severe. In fact, in certain cases, performing a balance transfer can even improve your credit score instead of harming it.
How balance transfers can help your credit
Here are several ways that a balance transfer can improve your credit score:
- Increasing your available credit: If you get a new credit card to perform the balance transfer, it will increase the amount of available credit you have across all your cards. This will lower your debt-to-credit ratio and can boost your score.
- Reducing the number of accounts with a balance: Both the FICO and VantageScore credit scoring models penalize you for having too many credit accounts with an active balance, so bringing your balance down to $0 on multiple cards with a transfer might improve your credit score. 1 2
How do I know whether the balance transfer will hurt or help my credit?
It can be hard to predict whether performing a balance transfer will increase or decrease your credit score because it depends on many different factors. Ultimately, you shouldn’t worry about the short-term effects too much. As mentioned, whether they’re positive or negative, they won’t be particularly significant or long-lasting.
The effect on your credit rating shouldn’t be your first consideration when deciding whether or not a balance transfer is right for you.
Is a balance transfer a good or bad idea?
Performing a balance transfer is a good idea if it’ll help you get out of debt that you’d otherwise struggle with.
That’s what you should really consider instead of the effect on your credit score. If the balance transfer will get you out of a financial hole, it’s probably worth it. Any temporary negative impact will be outweighed by the balance transfer making it easier to pay off your debts quickly, without incurring late payments (which are far more damaging to your score).
Just make sure that the balance transfer will actually be a net gain for you financially. Some credit card issuers require you to pay a fee before performing a balance transfer. If the fee is greater than the money you’ll ultimately save, obviously the transfer isn’t worth it.
Is it bad to do multiple balance transfers?
Yes, performing multiple balance transfers within a short period is a bad idea if you keep opening new credit card accounts to do so.
Applying for multiple credit cards to do balance transfers will lower your credit score for all the reasons mentioned above—not to mention that you may need to pay a fee each time you perform the transfer, which means you probably won’t end up saving that much.
Instead of doing multiple balance transfers on different cards, pick just one card to use, ideally the one with the lowest introductory APR over the longest period and with the lowest transfer fee.
How to rebuild your credit after a balance transfer
If you perform a balance transfer and it causes a dip in your credit score, don’t worry—the effect will be temporary.
While you wait for your score to recover, here are some things you can do to rebuild your credit and get back on the right track:
- Limit your credit use: Whenever possible, limit the number of accounts you have with a balance and aim to keep your debt-to-credit ratio below 30% (and under 10% if you can). 4 This might mean avoiding using your other cards at all while paying off your balance transfer card.
- Pay all your bills on time: If you find it hard to remember to pay your bills, then try setting up reminders or enrolling in autopay.
- Keep your old credit cards open: Every open credit account you have contributes to your available credit, which benefits your score. Even after performing the balance transfer, keep your other cards open unless you can’t afford to do so (i.e., they’re hitting you with unmanageable fees).
- Reach out for help if you’re struggling with debt: Your credit card company wants you to be able to pay off your debts. If you think you might miss a payment, contact them as soon as possible to avoid getting a charge-off or collection account on your credit report. Your card issuer may be able to offer you an alternative repayment plan or temporarily pause your payments.