How Can Balance Transfers Affect Your Credit Score?
“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.
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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.
This factor refers to a borrower making on-time payments to debts. Missing payments can negatively affect a credit score. Payment history has the largest impact, usually about 35% of the score.
Credit Utilization Rate
Credit usage is approximately 30% of a credit score. 1 A 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.
Age of Your Credit Accounts
Your credit history typically accounts for 15% of a credit score. 1 Generally, a longer credit history will increase a score, all else being equal. 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 a score in terms of your credit history. However, when you open a new credit card the average age of credit will decrease.
New credit inquires generally make up 10% of a credit score. 1 Each time you apply for a new credit card, a “hard inquiry” is placed on your credit report. Inquires normally have a relatively small negative impact on credit scores, depending on the other information in your credit report. Too many applications for credit cards can negatively affect a credit score and can indicate a higher credit risk to lenders.
It’s important to remember that any change in your usage of credit or credit payment activity can affect your score. Credit scores move up and down which is reflective of the information within your credit file at any one point in time. Checking your credit score is a good way to keep up with changes within your credit report and monitor the impact of positive or negative events.
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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.