How do balance transfers affect your credit score?

A balance transfer can help or hurt your credit, depending on how you use it. (iStock)

Balance transfer credit cards can be an excellent way to consolidate and pay off credit card debt (and save hundreds of dollars along the way). These credit cards often provide an introductory 0% APR promotion, eliminating your interest costs for as much as a year and a half or more. 

If you're looking to pay down debt or looking to take advantage of the welcome 0% APR perk (or a relatively low APR) for 6 to 18 months, then consider using an online marketplace like Credible to compare some of the top balance transfer cards side by side.

Just note: Depending on the situation, a balance transfer card can potentially affect your credit score. Here’s what to know and how to use your new card to build your credit history.

Do balance transfers hurt my credit score?

Transferring debt from one credit card to another doesn’t impact your credit score directly. But the process can result in some changes to your credit report, which can impact your credit file.

There are two major factors that can hurt your credit score:

  1. A hard inquiry on your credit report
  2. How much you owe on a credit card 

1. A hard inquiry on your credit report: When you apply for a credit card, the card issuer will run a hard inquiry on your credit report. For most people, the credit check will lower their credit score by five points or fewer, according to FICO. Also, the impact of a credit inquiry is temporary and likely won’t make much of a difference to your score in the long run.

2. How much you owe on a credit card: One of the most important factors in your credit score is how much you owe, which is partially represented by your credit utilization rate — how much you owe on a credit card relative to its credit limit. The lower your utilization rate, the higher your credit score.

For example, if you have a $5,000 balance on a card with a $15,000 limit, your utilization rate would be roughly 33%. If you were to transfer that debt to a card with a $6,000 balance, it would increase your utilization rate to 83%, and your credit score will likely drop because of it. 

However, as you pay down the card balance, your credit score will recover. If you’re considering a balance transfer credit card, use a marketplace like Credible to compare your options.


How can a balance transfer improve my credit?

Getting a balance transfer card allows you to consolidate one or more credit card balances into one, simplifying your repayment process. As you continue to make on-time payments on your new card, your credit score will benefit from the positive payment history. On the flip side, missing payments could damage your score significantly. 

Also, if your new balance transfer card has a higher credit limit than the original card, it could lower your credit utilization rate, which can help improve your credit score. 

Visit Credible to shop around and compare balance transfer cards to find the right one for you.


What to do after completing a balance transfer

A balance transfer credit card comes with features that can help you pay down your credit card debt, but it won’t do the work for you. 

Once you’ve completed your balance transfer, avoid charging any new purchases to your credit cards while you pay off the debt. If you continue to rack up debt on the old card while you’re paying down the new one, it can feel like you’re taking two steps forward and one step back.

That said, avoid closing the old card because it could increase your overall credit utilization rate across all of your credit cards. 

To tackle the debt, divide the balance by the number of months you have with the intro APR promotion. Then make a budget to make the necessary payments to get rid of the debt before the promotional period ends.


Is a debt consolidation loan a better option?

A personal loan could be another option to consider for paying down credit card debt. These debt consolidation loans don’t come with an intro APR promotion, but personal loans charge lower interest rates on average than credit cards — that’s 9.5% for a two-year personal loan vs. 14.52% for credit cards, according to the Federal Reserve.

By paying off your debt with a consolidation loan, it’ll reduce your credit utilization rate—which is only calculated for credit cards — to zero, which could improve your credit score. It’ll also give you a set repayment schedule, which isn’t a feature with credit cards.

It’s also important to note that many balance transfer cards charge upfront fees, and many personal loans charge origination fees. Consider these as you research your options.

Use an online marketplace like Credible to compare both balance transfer cards and personal loan rates to see which option is best for you.


Make good credit management a priority

As you work on paying off credit card debt, it’s crucial to make it a goal to use your credit cards responsibly going forward. This includes paying your bills on time and in full every month to avoid interest charges. It also means using a budget to ensure you don’t end up overspending. It may also mean sticking to a debit card or cash.

As you work to get a handle on your spending, you’ll have a better chance of avoiding credit card debt in the future.