How a Balance Transfer Affects Your Credit Score

You don't get bonus points (or lose points) just for moving debt. But if you use the transfer as an opportunity to pay down your debt, you can improve your credit.

Lindsay KonskoNovember 21, 2017
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Moving high-interest credit card debt to a card with a lower rate — or, better yet, a 0% interest period — can save you hundreds of dollars while making it easier to pay down what you owe. As the cornerstone of a debt-reduction plan, a balance transfer can be a very smart move, but it won't affect your credit score much. At least, not directly.

What a transfer does and doesn't do

When you transfer a balance, you are paying off existing debt with a new credit card. Assuming 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.

Balance transfers don't change the past. Missed payments on the old account will still affect your score.

When thinking in terms of your credit score, it's 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 seven 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.

Saving money with a transfer

A balance transfer should save you money. If it doesn't do at least that much, there's really no point in doing one.

For example, let’s say you’re carrying a balance of $10,000 on a card that charges 15% interest, and your goal is to pay it off in the next 12 months. If you just leave the debt on that card while you pay it off, you could expect to pay about $830 in interest. But move it to a card with a 0% APR for 12 months, and interest would cost you nothing. Keep in mind that most cards charge a balance transfer fee of 3% to 5%. In this example, a 3% fee would cost you $300, so you'd come out $530 ahead.

How a transfer can help your 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 keep your credit utilization ratio below 30% at all times — both on a per-card basis and across all of your cards.

Adding a new card with a new line of credit reduces your overall credit utilization.

Let’s illustrate this with an example. Say a consumer has two credit cards:

  • Card A: $5,000 limit with a $2,000 balance

  • Card B: $3,000 limit with a $1,000 balance

This consumer has a 40% utilization ratio on Card A, a 33% utilization ratio on Card B and an overall utilization ratio of 37.5% ($3,000 divided by $8,000). On each card as well as overall, this consumer’s debt is over the 30% ceiling.

Now say this person gets a balance transfer card (Card C) with a $6,000 limit and moves all the other debt to it. This person now has a utilization of 0% on Card A, 0% on Card B, 50% on Card C and 21% overall. On the whole, this will look better on the consumer's credit report. And, of course, the transfer has put this person in a position to pay down that $3,000 debt more quickly because of the interest savings.

One final note: Applying for the new balance transfer card might knock a few points off the score initially, but paying down the debt and using credit responsibly going forward should mitigate or even cancel out that effect in the longer term.

Attacking debt, not moving it, is the key

The simple act of performing a balance transfer isn't going to improve your credit score much, if at all. Some people even use repeated balance transfers to avoid having to deal with their debt. The result is that their debt simply grows because every time they get a little breathing room with a 0% period, they keep spending rather than shifting into debt-repayment mode.

The key to improving your credit score is to use the transfer to reduce your debt — both in dollar terms and as a percentage of your available credit. Eliminating debt sends the kind of signals that result in better credit scores.

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