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, inquiries 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 5–20 points, however, and you’ll recover from it quickly with timely payments.
- Status and number of applications. An application for a balance transfer that’s rejected 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. Being unable to meet the regular minimum repayments and not repaying your balance by the end of the promotional period can increase your level of debt and have a negative impact on your credit score.
- Remaining accounts. Failure to close your old account after you’ve transferred your balance to a new card can have a negative impact on your credit score unless you’re making regularly repayments on both accounts.
- Multiple transfers. Not being able to repay your debt by the end of the promotional period and having to move the remaining amount to another balance transfer credit card can also look bad on your credit file.
Could a balance transfer credit card help my score?
Your credit score may also make a positive shift, albiet potentially a small one. Initiating a balance transfer can lift your credit score by increasing your credit utilization rate. As the term implies, it’s 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. The lower your utilization rate is, the better it is for your credit score.
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 will 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 when 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. Annual fees may motivate you 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.
Maximum balance transfer rule
The most you can transfer will depend on the credit limit of the credit card you’re transferring to. That maximum credit limit will depend heavily on your credit score. Because of how these interact, your credit score will likely directly affect how much of your debt you can transfer.
You may see a slightly lower limit on how much you can transfer at times. This is almost always because of a balance transfer fee, which normally adds 3% to 5% to the cost of the transfer. For a debt of $5,000 and a 5% transfer fee you would need a credit limit of $5,250 (5,000 x 1.05) or more.
Taking a closer look at credit utilization rate
Be careful about what transferring your debts might do to your credit utilization rate, also known as debt-to-limit ratio, with multiple balance transfer credit cards. Your credit utilization rate is how much credit you have versus how much you’re using. Or, more technically, the amount of outstanding balances on your cards divided by the sum of each card’s limit.
Understanding your debt to limit ratio
- You have a $500 balance on your current card. This card has a $1,000 credit limit. Right now, your credit utilization rate is 50%.
- Now you transfer that $500 balance to another card with a $2,000 credit limit, which brings your credit utilization rate down to 25% (500 divided by 2,000).
However, a new balance transfer credit card with a maximum limit of $2,000 and a transfer of $2,000 worth of debt onto it would bring your credit utilization rate on your new card up to 100%.
As a rule of thumb, creditors like to see a credit utilization rate of 30% or less — you can see how you’ll need to consider both of your credit utilization situations — on your old card and your new card — to understand how it affects your score.
Further, a new credit card will reduce the average age of your credit accounts, and around 15% of your credit score depends on credit age.
If you do your research, make a plan and use your best judgment on future choices, a balance transfer card could be the first step toward financial freedom.
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Compare balance transfer credit cards
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 minimize the impact it could have on your file.