Transferring balances from one credit card to another can help save money on interest, especially if you take advantage of 0 percent interest offers on new credit cards. Because the process of transferring balances sometimes involves new credit cards and does change your credit utilization on each card, it can affect your credit score.
Credit Utilization
The main way in which balance transfers affect your credit score is through credit utilization. Your utilization ratio is the balance on each card divided by that card's limit. The lower the ratio, the higher your credit score will be. Your credit score also considers your overall utilization ratio, which you calculate by adding up all of your credit card balances and dividing that by the sum of all your credit lines.
Example of Utilization
Say you have three credit cards, each with a limit of $5,000 and a balance of $3,000. Your utilization ratio for each card is 60 percent and your overall utilization ratio is also 60 percent. These ratios both hurt your credit score. If you get a new card with a limit of $10,000 and transfer your $9,000 of balances to it, that card will have a utilization ratio of 90 percent. This very high ratio will hurt your score. However, if you keep your other three credit cards open, their 0 percent utilization ratios will help your score, as will your overall utilization ratio of 36 percent instead of the 60 percent you had before.
Payment History
If you transfer all your balances to one credit card, this can help you stay on top of your monthly payments rather than letting one of the many payments slip through the cracks. Plus, your credit card will probably have a low interest rate that will make it easier for you to afford your monthly payments and reduce your balance. If you make your monthly payments on time each month, this will help your credit score over time by building a consistent payment history.
New Credit
Transferring balances among cards you already have will not affect your credit score as much as getting a new card and transferring balances to that one. When you get a new credit card, your credit report shows a credit inquiry, which hurts your score a little. The new account also reduces your score for a while, both in the portion of your score that considers new credit and the portion that considers your length of credit history and average account age.
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