How does a balance transfer affect my credit score?

Information verified correct on April 26th, 2017

How does a balance transfer affect my credit rating?Learn how a balance transfer can affect your credit rating and what you can do to ensure it has a positive impact on your credit score.

Opening a balance transfer card may affect your credit in some good ways and in some bad ways. Your credit score — also known as your FICO score — changes based on a mix of factors, and getting a new balance transfer card will tweak them a bit.

Here we’ve unpacked how a balance transfer can affect your credit history and the easy steps you can follow to ensure it has a positive impact on your credit score.
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How can a balance transfer affect my credit rating?

Your credit file contains details of your entire credit history. It contains records of the type of credit you’ve been approved or rejected for, your payment history, enquiries for credit, the age of your accounts and credit usage, each of which have an impact on your overall credit score. You can expect lenders to go through your credit file each time you apply for a new credit card.

Here are some of the ways a balance transfer could affect your credit rating:

  • Average account age. You might see a slight drop in your credit score when you apply for the card. That’s because opening a new account lowers what is known as your average account age. Lenders look at this metric because they want to see you’ve had a relationship with your credit card for a long time. This drop usually amounts to a small 5 to 20 points, however, and you’ll recover from it quickly with timely payments.
  • Credit utilization rate. Initiating a balance transfer can lift your credit score by increasing your credit utilization rate. As the term implies, that just means how much of your available credit you’re using. So if you have a balance of $500 and a credit limit of $1,000, your credit utilization rate is 50% ($500 divided by $1,000). Lenders like to see a low credit utilization rate; they want to see that you’re not anywhere close to maxing out your credit. So the lower your utilization rate is, the better it is for your credit score.
  • Status and number of applications. If you apply for a balance transfer and are rejected, this will have a negative impact on your account. Applying for several credit cards at the same time or within a short period of time will have a similar outcome on your file. New credit accounts constitute 10% of your credit history, so it’s important to consider this when applying for a new card.
  • Repayment history. If you are approved for a balance transfer but are unable to meet the regular minimum repayments and can’t repay your balance by the end of the promotional period, thereby increasing your level of debt, this could have a negative impact on your credit score.
  • Remaining accounts. If you fail to close your old account after you’ve transferred your balance to a new card, this can have a negative impact on your credit score unless you’re making regularly repayments on both accounts.
  • Multiple transfers. If you’re unable to repay your debt by the end of the promotional period and have to move the remaining amount to another balance transfer credit card, this can also look bad on your credit file.

What goes into my credit history?

Credit card details

Percentage of credit file

Payment history

35%

Outstanding debt

30%

Established credit

15%

Credit limit

10%

Type of credit

10%

How to understand your Fico

How can I prevent my balance transfer from having a negative impact on my credit rating?

There are a few easy steps you can follow to keep your credit file in good standing when conducting a balance transfer:

  • Don’t apply too often. When applying for credit cards, try to spread your applications over six months or one year periods. Applying for new cards over a longer period of time will have a less of an impact on your credit file.
  • Review terms and conditions. Go through the balance transfer offer terms and conditions at the very onset. Account for all applicable fees, including any hidden charges, ongoing annual fees and calculate whether you can afford the card. You’ll also need to confirm whether you meet all of the eligibility requirements, such as minimum income, credit score and residency, and that you have all of the required documents to ensure your application isn’t rejected.
  • Pay on time. Making a late payment can result in the termination of the promotional balance transfer offer, so do your best to repay your balance on time. By repaying the entire balance before the promotional period ends, you demonstrate your willingness and ability to repay outstanding debts, and you can expect lenders to view this with favor. Not repaying the entire balance before the promotional period ends would have you paying higher interest on any outstanding balance, and can also impact your ability to get a new card.
  • Avoid new purchases. Avoid making purchases during the balance transfer period, as this could increase your debt. Your repayments will automatically go towards whichever debt accrues a higher interest, which is more than likely going to be the purchase if a low or 0% balance transfer rate is in place. This means that you’ll be wasting funds you could be using to consolidate your debts to repay purchases. Again, your inability to repay your balance can have a negative impact on your credit score.
  • Don’t cancel your old cards if you don’t have to. If your old cards have an annual fee, you may want to cancel them. But if your old cards have no annual fee, you may want to consider keeping them open so you can raise your credit utilization rate and decrease your debt-to-limit ratio. Read on to understand what that means.

Understanding your debt to limit ratio

If you’re looking at maintaining good credit history or improving your credit history, knowing how debt to limit ratio works can help, because this often plays a role in a lender’s willingness to offer credit. The debt to limit ratio essentially points out how much of your available credit you’ve utilized.

Case Study

If you, for example, have a credit card with a credit limit of $20,000, and your last closing balance was $6,000, you’ve used 30% of your card’s available limit, and your debt to limit ratio is also 30%. While there is no strict benchmark in place, it’s common for lenders to show less interest in lending to individuals who have high utilization rates, and getting a new card for a balance transfer can affect this ratio.
A low debt to limit ratio is always good, and debt to limit ratio of around 30% should not have any adverse effect on your creditworthiness.

Similar to any type of credit card, a balance transfer credit card can have a negative impact on your credit rating. Researching and comparing your balance transfer credit card options beforehand will ensure you’re applying a card that you’re both eligible for and can afford, increasing your likelihood of approval. Managing your card with a budget in mind and doing your best to repay your balance before the promotional period ends is another way you can reduce the impact a balance transfer has on your credit card. Balance transfers can be a great way to consolidate your debt without the cost of interest, but conducting research and managing your finances is crucial if you want to reduce the impact it could have on your file.

Frequently asked questions

When should I inform my new card issuer of my desire to transfer balances from other cards?

You should ideally do this at the time of application, or soon after you find out about your new card’s approval.

How can I get a copy of my credit file?

You can request for a free copy of your credit file by following these steps:

  1. You may contact the Central Source by visiting www.AnnualCreditReport.com
  2. You can request by phone and call 877 FACTACT
  3. You can complete the Request Form and mail it to:
    Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281

Is there is limit to how much I can transfer through a balance transfer offer?

This varies from one credit card issuer to the next. Most providers will allow you to transfer 85-100% of your credit limit.

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