Benefits of a balance transfer and the impact on your credit score

Consider this scenario: You’ve had a credit card for a few years, but you open a letter and see an interesting offer — another credit card issuer is offering a considerably lower introductory interest rate, maybe even 0% for 12 months. Sounds interesting, right? But do you pursue it?

Or maybe, you’re considering credit card debt consolidation (in other words, combining debt onto one credit card) for easier management. In either case, you may be wondering if there are drawbacks.

This post will help you determine the answer to the question, “Does doing a balance transfer lower your credit score?” so you can make your next financial move fearlessly!  

Here’s what else to expect: We’ll cover a balance transfer’s impact on your credit score by outlining potential pros and cons, so you feel more informed about what could impact your credit score and making strides towards the best money management you can for your unique situation.

Plus, if keeping tabs on your credit score is important, you’ll want to know that Spruce lets you keep tabs on your credit score^{Disclaimer number5. Go to disclaimer for more details.}for free.

Benefits of balance transfer and the drawbacks

People choose to do a balance transfer with credit cards for a number of reasons:

• Saving money on interest charges. Who wants to pay more than they need? Um, no one! A credit card balance transfer helps you take advantage of promotional rates offered by other credit card companies — like a 0% interest rate for a set amount of time. After that time, the interest rate goes back to the usual rate. The advantage of a 0% interest rate is that the less money you have to spend on interest, the more money you can put towards the principal balance and pay it off faster.
• Paying down debt faster. If you’re putting more money towards your principal balance (because the interest is lower or 0%) you’ll be able to knock out your debt more quickly and get one more thing off your mental workload.
• Reducing monthly payments. Paying lower interest could mean a smaller overall payment. If your budget is tight, this may help in the short run, but keep in mind that low rates are generally only offered during an introductory period.
• Introductory periods. The longer the introductory period, the more time you have to pay no interest or a lower rate. If considering a balance transfer, look for a card with the longest introductory period possible but be sure to also compare the fees and features of the accounts, especially if it is likely that you won’t have the credit card paid in full by the end of the introductory rate.  But watch out! Depending on the terms, you could owe backdated or deferred interest for the full amount if the balance isn’t paid by the end of the introductory period.
• Reducing payments to one lender. Another benefit of balance transfer is that you may be able to consolidate your debt into one credit card lender for easier management. For many, dealing with one payment instead of several can make debt management that much less stressful.

While the benefits of balance transfer are broad, you’re probably wanting to gut check, “Is this the right thing for me?”  Here are some cautions that could help you weigh the decision:

• Keeping track of the promo end date. If the debt is not paid off during the introductory period, the lender will start charging interest on the remaining balance (or it could be backdated/deferred as mentioned above), and it could turn out to be a higher rate than the original card.
• Looking out for fees. While the lower interest rates sound enticing, there may be fees (like balance transfer fees or interest charges) involved in balance transferring.
• Using your card benefits. In some cases, credit card perks (like points) may be applied as part of a balance transfer.

Does a balance transfer impact your credit score?

Aside from the benefits and drawbacks mentioned above, one critical consideration is understanding any impacts to your credit score. So, does a balance transfer hurt your credit? The answer is not one size fits all. A balance transfer may adversely impact credit score depending on a few factors.

Depending on your circumstances, your score may go up or down. Some of these factors include — whether a new credit card was opened, the credit limit on the new card, how fast debt is paid down after the balance transfer, the change to your credit utilization rate, and the type of credit score pulled.

Generally, applying for a new credit card will involve a hard inquiry on your consumer credit report, which stays on your record for a few years and does negatively affect your credit score in the short term. Another short-term negative impact, though usually quite minor, is lowering of the average age of your credit accounts. Why is this the case? Because it’s preferable to have older accounts to demonstrate your long-term accountability to lenders. However, both hard inquiries and average account age are components that typically don’t affect your credit score as much as your overall outstanding debt and payment history. 

Just be sure you are strategic about when and how often you incur hard inquiries. Plus, try not to close older accounts at the same time as opening new ones as both moves can lower the average age of your credit accounts. 

With that in mind, even with the ding from a hard inquiry, if the new credit card will lower your overall outstanding debt to available credit ratio and improve your ability to make payments, your credit score may very likely improve in the long term. So, when contemplating the question, “do balance transfers lower your credit score?” rest assured that it can be a smart step if taken with a plan and a little research.   

If your credit history is a concern, you’ll want to keep one thing top of mind: Your goal should be to pay off debt, not to accumulate more.  

Want help understanding your credit score? Get extra guidance on how to build or rebuild your credit score.

How to transfer a credit card balance

If you’ve decided that moving your credit card debt is right for you, you’ll need to know how to do a credit card balance transfer. The process requires just a few relatively simple steps, which we’ve distilled here

• Check your current interest rate(s) and credit score. First, establish a baseline. Review your existing credit card’s interest rate. You can find it by logging into your account online or calling the lender. Then, check your credit score. You can use Spruce to understand what makes up your credit score and how different factors impact it. With Spruce, you can keep tabs on your credit score^{Disclaimer number5. Go to disclaimer for more details.} and learn the items impacting it with ease.
• Research and compare credit cards you’re interested in. You’ll want to find one that offers an incentive for transferring, such as 0% APR for an introductory period, or other promotional rates This allows you to pay off your debt interest-free over the introductory period. Then, check for the interest rate after the promo period as well as transfer fees.
• Request the transfer. You may be able to read details and request the transfer through your new account. In other cases, you can request this from the credit card’s website or call center. Either way, be sure to have all the necessary info ready:
• The amount of debt you’re transferring
• The card and account information associated with your account. 
• Watch for the balance transfer to clear. When you transfer a balance on your credit card, what happens next?  Well, you may not be alerted, so you’ll want to keep an eye on your accounts to ensure you don’t miss a payment on either the old or new accounts. Once the transfer has gone through, you can start making payments on the new card.
• Pay down your credit card balance. A good earmark of money management is to manage your debt to credit ratio. To do this, pay down your credit card balances as quickly as possible and make your monthly payments on time. You don’t necessarily have to do this in full each month, so check your monthly credit card statement and know what you owe.

Parting thoughts on credit scores and balance transfer

Learning about credit can take time and discipline — but once you learn the basics, you’ll be on your way to making better decisions for your financial future. 

Want more help understanding concepts such as your credit score or credit reports? Check out Spruce’s Resource Center to learn about important credit topics.

Then, learn all about the features Spruce, a mobile banking app that supports you in all things personal finance, has to offer. 

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This information is provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.