Are Balance Transfers Bad for Your Credit?

If you have a significant balance on a credit card that carries a high interest rate, such as 16 percent or more, and you receive an offer in the mail for another card with a lower rate, you may not think twice before deciding to transfer your balance to the lower rate card in order to save money. However, if you are interested in improving a mediocre credit rating or in maintaining a stellar credit score, you should carefully consider the potential effects of a balance transfer on your financial future.

The Cost of Transfer

Before making the transfer, consider the total cost. While the original credit card company cannot charge you a fee to transfer a balance, since in effect you are "paying" the debt on that card, the new company often does. Without careful comparison shopping, you could end up with hundreds of dollars in transfer fees being added to your credit balance on the new account, adversely affecting your debt-to-credit limit ratio and ultimately your credit score.

Credit Inquiries

Each time you apply for a new credit account, the issuer will make an inquiry into your credit report. The major credit bureaus---Experian, TransUnion and Equifax---record each new inquiry on your credit history. Several credit card inquiries within a short period of time can indicate that you are financially overextended, and this can adversely affect your credit score, also known as your FICO (Fair Isaac and Co.) score. According to FICO, one additional credit inquiry usually takes less than five points off their FICO score. If you are trying to improve your rating, applying for several new cards for the purpose of balance transfers will add up to a lower credit score. One or two applications, however, will have a lesser effect.

Credit History

You should also consider keeping an older credit card account active with lighter use rather than closing it. A longer history of using credit makes for a better score. The best strategy, however, is to keep the credit cards you have and consistently make payments to lower the balances, rather than moving your debt to new cards. Liz Weston, writing for MSN Money, says getting your balances below 30 percent of the credit limit can really help, while getting balances below 10 percent is even better. By paying down credit card balances, you improve your debt-to-credit ratio, which reflects positively on your FICO score.

Credit Balances and Credit Scores

Don't let the initial relief of lowering your monthly minimum payment via balance transfer blind you to the big picture. Paying down that balance is critical to improving your FICO score. Disciplining yourself to faithfully reduce your credit balance each month will do your credit rating the most good. Above all, don't miss a payment, because "a single skipped payment can knock as much as 110 points off your FICO score," according to Weston.