“How will a balance transfer affect my credit score?”

When you have high interest credit card debt, a balance transfer can be an enticing offer. While a balance transfer can save you money in the short term, it’s important to consider the overall impact on your credit score.

How a balance transfer will affect your credit score depends on several factors, including:

  • The total amount transferred
  • Your new available credit limit
  • If you’re transferring to pay off a credit account in full
  • If you close a credit account. Keep in mind that closing an account will not remove it from the credit report, so it will be calculated into the score.  The closed account can be used to determine length of credit history and also payment history.

Of course, paying off the balance after you transfer may also affect your credit score.

How your credit score is calculated

A credit score provides a lender a quick way to gauge your creditworthiness by measuring the likelihood you will pay your loans back and on time. Your credit score is usually based on five factors: payment history, credit usage, age of accounts, types of credit and credit inquires.

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Credit Utilization Rate

Credit usage is approximately 30% of your credit score1. Your credit utilization rate, also known as your balance-to-limit ratio compares your total balances to your total credit limits. Generally, the higher your credit utilization, the lower your credit score will be. 

The keys to raising your credit score are to pay off your debt as quickly as possible, or shift your balances to a low interest credit card. Transferring a balance from one credit card to a new card may add an inquiry to your file, which could cause a temporary, small decrease. However, you aren’t taking on new debt and you are increasing your available credit, this should decrease your total balance-to-limit ratio, which may increase your credit score.

Age of Your Credit Accounts

Your credit history accounts for 15% of your credit score1. Generally, the longer your credit history the higher your score. Your credit history is calculated by taking the average the length of your credit accounts and the age of your oldest account. Balance transfers between existing credit accounts typically won’t impact your score in terms of your credit history. However, when you apply for a new credit card your age of credit will decrease. Also, if you close a credit account after transferring its balance that can impact your score because it will reduce the overall age of your credit accounts.

Credit Inquires

New credit inquires make up 10% of your credit score1. Each time you apply for a new credit card, a “hard inquiry” is placed on your credit report. Hard inquiries from credit card issuers remain on your credit report for 2 years1. According to FICO, inquires generally only drop a credit score five points or less depending on the other information in your credit report. Too many applications for credit cards can harm your credit score and reduce your chances of approval because it often indicates you pose a higher lending risk.

It’s important to remember that any change in your credit use can affect your score, but over time this could be a positive change. Credit scores frequently move up and down frequently to reflect the information changes within your credit file. Checking your credit score is a good way to keep track of changes to your credit and monitor the impact of positive or negative events.

When considering a balance transfer it’s important to look at the big picture and read the fine print carefully. Understand all the costs involved and think about the cost of the balance transfer versus the long-term cost of carrying high interest debt.

[1] myFICO.com

[2] “Understanding Credit Utilization” About.com

Discover card believes that consumers should be armed with the information they need to help them make informed credit decisions.

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries.

Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. 

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