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A balance transfer typically occurs when you transfer debt from one credit card onto another card with a lower interest rate. Even though such transfers do not reduce the amount you owe, they can affect your credit score in several ways.
It is not the balance transfer itself that can initially hurt your credit score but rather the credit inquiry that happens when you apply for a new credit card. Every time you submit an application for a new card, a hard inquiry is triggered. Apply for only one card, and your score might drop by as little as 5 points. Apply for three, four or five cards, and your credit score might drop noticeably. Hard inquiries make up about 10 percent of your credit score and remain on your report for as long as 2 years. Companies that monitor your credit score for you, like credit report monitoring services or credit repair companies, do not use hard inquiries when accessing your credit report.
Before discussing the positive effect a balance transfer can have on your credit score, it’s important to understand what your credit utilization ratio is. In a nutshell, it is how much credit you are using divided by how much credit you have available. Ideally, this number should be no more than 30 percent. Remembering that figure is easy if you also keep in mind that credit utilization accounts for about 30 percent of your overall score.
A balance transfer can boost your score if your new card provides you with additional available credit. Say that your previous card gave you $5,000 of credit and you had $3,000 available. This new card gives you $10,000 of credit, and you’re still using only $2,000. Your credit utilization ratio is now a lot more attractive, and if you decide to keep the old credit card account open, you have even more available credit.
Credit utilization ratio aside, there is another good reason not to close your old account. Leaving the account open keeps the average age of your total accounts about the same, while closing the account will cause the average age to drop. This age accounts for about 15 percent of your overall credit score, so the older it is, the better.
The bottom line is that a balance transfer may have little initial negative effect on your score, especially if you apply for only one card before making it. However, if you play your cards right, a balance transfer can also give your credit score the boost it needs.