If you’re wondering if shifting some dollar-dollar-bills around will hurt or help your credit, you’re not the only one with this wriggling question. Short answer: with some foresight and maneuvering, it can help your score.
There’s a little something you can do if you’re being hammered by high interest rates – move to a card with a lower rate (or even zero)! A move like this could save you a lot of money while also making it so much easier to pay off your original debt. Keep in mind that, while balance transfers don’t hurt your score, the application for a new credit card might. Read on to find out the balance transfer deets.
How Could It Hurt?
Anytime you apply for a new credit card, it results in a hard inquiry on your credit report. This will shave off a few of those hard-earned credit score points and could stay on your report for up to two whole years. This is what will happen if you apply for a new card to transfer your balance. It’s up to you to weigh the pros and cons of that. Which is worth more to YOU: a slightly lower credit score and much lower interest rate, or the same credit score and same interest rate? Steady, but doesn’t really work for you.
Opening a new card also affects the length of your credit history. It reduces the average age of your credit which tends to knock a few points off your score. Fewer cards mean a bigger impact too. But remember that Payment History has a greater impact on your score than Credit History, so if you can make smaller payments on time EVERY time, it won’t be too long before that point loss begins to balance out.
How Could It Help?
While just doing a simple balance transfer alone won’t affect your credit much, if used properly, it could reduce your debt – both in dollar terms and as a percentage of your available credit. Every dollar you don't have to pay in interest is a dollar you can use instead to pay down your debt. That allows you to shrink your debt faster — and shrinking your debt is good for your credit.
The amounts you owe account for 30% of your FICO credit score, and the dollar amount of your debt is a factor there. Another factor is your credit utilization ratio, or the percentage of your available credit that you're using. A good rule of thumb is to always keep your credit utilization ratio below 30% — both on a per-card basis and across all cards. Adding a new card with a new line of credit reduces your overall credit utilization.
Is a Balance Transfer Worth It?
A balance transfer should save you money. If it doesn't do at least that much, there's really no point in doing one.
When you transfer a balance, you are paying off existing debt with a new card. If you move the debt to a card with a lower interest rate, it'll cost less money to maintain that debt going forward. That means you can devote more money to paying down the principal on the debt, rather than paying interest.
It’s also important to understand what a balance transfer does NOT do:
- It does not reduce the total amount of money you owe. If you owe $5,000 on one card and transfer it to a new card, you still have $5,000 in debt; it's just in a new place. You're also still on the hook for any unpaid interest that accumulated on the account before you transferred the debt. That's part of what you paid off with the new card.
- It does not change anything that happened with the old account. The account from which you transferred the debt will remain on your credit report, even if you close it. (Accounts closed in good standing can stay on your report for 10 years; those closed with negative marks can stay for 7 years.) If you missed payments on the old account, those missed payments will still show up and will still factor into your credit scores.
Simply put, a balance transfer won't change anything that's already on your credit report. But it sets you up for moves that can improve your credit down the road, plus it can save you money in the near-term.
The Verdict: Done right, worth it.