Balance transfers are one way to consolidate debt and lower interest payments. They can also affect several components that are used in determining your credit score. This score is an indication to lenders of how reliable you are and can have a huge impact on your long-term savings for large loans such as mortgages. Before transferring balances, evaluate how it will impact your credit score and determine if the savings are worth it.
Payment History
Approximately 35 percent of your Fair Isaac Corporation (FICO) score is based on your payment history. If you are making payments on credit cards with a high annual percentage rate (APR) and are struggling or unable to make the minimum payments on time, this has a negative impact on your score. Transferring the balance to a lower APR credit card that you are able to fulfill payments on will help your credit score and save on interest payments.
Debt-to-Credit Ratio
The amount of debt you carry in relation to your total credit available accounts for 30 percent of your FICO score. A debt-to-credit ratio is calculated by taking your total debt and dividing by your total available credit. For example, if you carry $1,000 of debt with a total credit limit of $10,000, your debt-to-credit ratio is 10 percent. It's good to keep this ratio between 10 to 30 percent.
Opening a new credit card to transfer an existing balance creates more available credit, which brings your debt-to-credit ratio down and helps your score. Keep in mind that the debt-to-credit ratio is looked at in total and by individual credit card, so maxing out one card by transferring your other card balances to it could hurt your score.
Length of Credit History
The length of your credit history accounts for 15 percent of your FICO score. This factor looks at the average age of your accounts. Opening a new card lowers the average age of your accounts and therefore lowers your credit score in the short term. While opening a new card to make a balance transfer can be a good idea the first time around, repeatedly opening cards and transferring balances will hurt your score.
Applying for Credit
About 10 percent of your score is based on the inquiries on your credit report. When you apply for a credit card or other type of loan, an inquiry is made by the lender to check your credit score. Multiple inquiries can hurt your score, because it gives the impression to lenders that you are looking for more credit because you are experiencing financial difficulty. Applying for multiple cards to make balance transfers can therefore harm your credit.
Balances Transfers Without Applying for a New Card
All these factors affect your credit score when you apply for a new card to make the balance transfer. However, if you transfer a balance from one card to a preexisting credit account that has a better APR, most of the components affecting your credit score will not change as a result. The impact on payment history is the same whether you use a new or preexisting credit card. Your overall debt-to-credit ratio will not change, though the ratio by accounts could cause a fluctuation in your score. The length of your credit history and inquiry portions of your credit score will not be affected. The risk of lowering your credit score by using a preexisting credit account is less than applying for a new card to make a balance transfer.
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