How Does a Balance Transfer Affect My Credit Score?

To understand how a balance transfer can affect your FICO credit score, let’s first look at elements of the score and how their importance is weighted.

• Payment History — 35%
  Your payment track record makes up the largest percentage. This is why it’s so important to make payments on time! Automating payments will ensure that they are never late.
• Amounts Owed — 30%
  Often called credit utilization ratio, this takes the amount of debt owed at a specific snapshot in time and divides it by the amount of total available credit. For example, if you have $2,500 of debt and your available credit is $10,000, your ratio would be $2,500 ÷ $10,000 or 25%. You should strive to keep this percentage under 30% at all times.
• Length of Credit History — 15%
  History looks at how many years accounts have been open.
• Credit Mix — 10%
  Credit cards and lines of credit have fluctuating balances and are referred to as revolving credit. Installment loans, such as mortgages and auto loans, have a larger set amount that is paid off over a period of time.
• New Credit — 10%
  The number of newly opened credit accounts is considered, too.

How can a balance transfer help my credit score?

• Opening a new credit card as a result of a balance transfer improves your credit utilization ratio. If you’re transferring balances from two or more accounts, you’ll be opening one with larger available credit. Your debt will not increase, but your available credit does, so your utilization percentage will be improved.
• A balance transfer card also empowers you to pay down debt more quickly at a lower interest rate. That’s the best way to improve your credit score!

Why would a balance transfer hurt my credit score?

• Whenever a lender checks your credit report, they make a “hard pull” on your credit. Each of these pulls will reduce your credit score by a few points.
• When you transfer balances, your old debt becomes new debt on a newly opened card. That means your average age of accounts will drop, which also means a slight drop in your score.

Here’s a tip: Keep your old cards open, even with a zero balance! Closing them will negatively affect both your credit history and the amount of your available credit, thus your credit utilization ratio will also be affected. If credit has been made available to you, keep it and treasure it. Just be sure to not run up your balances!

Get the most out of a new balance transfer card

 
If you do open a new balance transfer account, consider the following:

• Be mindful of why you’ve incurred debt initially.
• Focus on debt reduction. Take full advantage of your new lower interest rate opportunity. You should always save for an emergency fund, but otherwise, pay off debt as quickly as you can.
• Avoid additional new charges on your balance transfer card. In fact, it’s best to not think of it as a card at all. Think of it as a monthly invoice, like a utility payment or an installment loan.
• Make all payments on time. With good payment history and reduced debt, your credit score will take care of itself!

 Remember, life has its ups and downs and so do credit scores. An initial temporary ding of a few points from a balance transfer is well worth it to reduce debt quicker and earn a higher FICO score for your future. Consistent, on-time payments will go a long way towards recovering your score from the act of transferring balances!