What Happens to Credit Ratings With a Balance Transfer?

Transferring a credit card balance to another card with a lower interest rate is a useful way to lower your costs and put more of your money toward paying off your debt. The effect of the balance transfer on your credit score depends on your situation and how you execute the transfer.

Opening a New Card

Many credit card companies offer low introductory interest rates on balance transfers for people who sign up for a new credit card. However, opening a new card will hurt your credit score. First, when you fill out a credit card application, the credit card company checks your credit, which generates an inquiry on your credit report. Unless you have a very thin credit file, the inquiry should hurt your score by five points or less. When you get the new credit card, this adds a new account to your file, which will temporarily hurt your score as well. The effect varies depending on how many older accounts you have in your credit history.

Credit Utilization

The major way in which a balance transfer can affect your credit score is through changing your credit utilization ratio. Your credit score penalizes you for using a high percentage of your available credit, both on each individual card and overall. Therefore, if you get a new card with a credit line of $4,000 and transfer $4,000 onto it from another card, your new card will be maxed out, which will hurt your score. However, adding additional credit to your report will also increase your total overall credit and decrease your overall utilization, which helps your score. For example, if you used to have one card with a balance of $5,000 and a limit of $8,000 and now you have a total limit of $12,000 with the same $5,000 of debt, your overall utilization has decreased from 62.5 percent to 41.7 percent.

Closing the Old Card

If you close your old card after transferring the balance off it, this can hurt your credit score. This is because the empty credit card with lots of available credit helps lower your overall credit utilization. Therefore, unless you absolutely cannot trust yourself to have a card with an empty credit line, keep the credit card until you have paid down your debt. Cancel the card only if your overall utilization will still be under 30 percent after you cancel the card.

Payment Tips

Step carefully while you are making the balance transfer to ensure that you do not miss any payments. Even one late payment can have a significant negative effect on your credit score, especially if your score was excellent before. Keep making payments on your old credit card until you have confirmation that the balance transfer has been completed. It is especially important to make on-time payments on a new card with an introductory interest rate. If you miss a payment, your rate could skyrocket to the penalty rate, which will make your balance much more expensive to pay off and could cause further damage to your credit if the monthly payments are more than you can afford.