A balance transfer can help and hurt your credit score when you open a new balance transfer credit card account, but it may have a limited effect on your credit score if you are using an existing credit account to take on your balance transfer.
If you are transferring your balance to another credit account that is already open, you should understand how that might impact your credit. As you may know, your credit is calculated in different ways for different purposes: you have credit scores, and the three major credit bureaus have their own models for their credit reports. All of these models value your credit utilization ratio, but some credit score models calculate your credit utilization ratio for “per-card” utilization instead of overall credit utilization. While your overall credit utilization ratio is the same when you transfer a balance to another one of your existing credit cards, moving all of your debt onto one card can still negatively impact your credit by increasing your “per-card” utilization ratio, which may affect your credit score a bit.
If you open a new credit account for the balance transfer, the addition of a new credit limit to your credit profile can improve your credit utilization ratio, which can help your credit score. However, any new credit cards can affect your score by lowering the average age of your credit accounts and through the hard inquiries a new credit card issuer will perform against your credit report during application.
What factors are used to calculate a credit score?
A credit score is an estimate of how creditworthy you are: that is, how likely you are to pay back what you borrow, given your history with credit accounts. Credit scores consider many different elements of your credit life, including your history of on-time debt payments, the total amount of debt you have, the diversity of your credit mix, and the average age of your credit accounts
In the FICO® credit scoring model, payment history is most important, followed closely by your total credit usage and limits.
Factors for your FICO® Score break down as follows:
|What it means
How often you pay your credit bills on time as scheduled
Your current outstanding debts on your open accounts. This factor also looks at your credit utilization ratio on revolving accounts.
Length of credit history
The average age of your currently open credit accounts
How many credit accounts you currently have open
How often hard inquiries have been performed on your credit report in the last two years, which are pulled whenever you apply for new credit
How balance transfers may impact your credit score
Balance transfers can have multiple impacts on your credit, some positive and some negative. An important consideration is whether you open a new account for the transfer or use an existing credit card.
Using an existing card for a balance transfer: mixed credit score impact
The effect of transferring a large balance onto an existing card depends on which credit score model is used to calculate your credit score.
Credit utilization ratio calculated against all open accounts
If the relevant credit score model takes your total existing balances and divides them by the combined credit limits of all accounts, transferring your balance to another open card will have no effect on your credit score. As you are moving a balance to another card without adding any credit limit, the amount you owe divided by your available credit limits will stay the same after the transfer.
Credit utilization ratio calculated as average of individual open accounts
However, some credit score models will take an average of the credit utilization ratio for each credit card. Let’s say you have a credit card with a $4000 balance and a $10000 credit limit (credit utilization ratio of 40%) and another credit card with a $2000 balance and a $5000 credit limit (credit utilization ratio of 40%). Your average credit utilization per card would be calculated as 40% in this individual card credit score model.
Transferring $3000 of your balance on the first card to the other card will leave you with one card with a $1000 balance and $10000 limit (10% credit utilization ratio) and another card with a $5000 balance and $5000 limit (100% credit utilization ratio). The average credit utilization ratio would be 55%.
Before you commit to a balance transfer, calculate the average credit utilizations for your individual cards before and after the transfer occurs to understand any potential negative effects to your credit score.
Opening a new card account for a balance transfer: potentially good credit score impact
Opening a new balance transfer credit card can help your credit score by increasing the overall amount of credit you have available, improving your credit utilization ratio.
However, at the same time, a new card will lower your average account age, which makes up 15% of your credit score. And if you apply for several balance-transfer cards at once, that can throw up a red flag to creditors, as these types of inquiries made for new credit accounts represent 10% of your credit score.
Repeatedly transferring balances: potentially negative credit score impact
You may see 0% introductory APR offers for balance transfer credit cards as a way to delay interest from accruing against your debt. If that window is about to expire, but your debt hasn’t been paid down, you may think that moving the debt again to another 0% intro APR card can buy you more time.
But with each application for a new card, your credit score may take a minor hit. And multiple requests within the last two years can negatively impact your credit score to the point where earning approval for another card may become more difficult. Eventually, your debt may have no place to land without earning interest.
Because of this, it is best to use balance transfers with 0% introductory APR offers as a window for you to significantly pay down your debt, not simply avoid interest payments.
How to help your credit score with balance transfers
To help your credit score, use a balance transfer approach similar to this one:
1. Find a new credit card with a 0% introductory APR
To maximize the credit-score impact of a balance transfer, you can consider opening a new credit card account that features a 0% intro APR. While your overall account age will drop, you may be able to get more credit while putting a pause on your interest charges for a time.
2. Apply for only one card
Hone in on the balance-transfer card you will likely qualify for and apply just once. Multiple credit applications can negatively affect your credit score.
3. Use the card's 0% introductory APR window to pay down debt
Balance-transfer cards typically offer low interest rates for a limited amount of time. Use this low-interest period to make as big of a dent in your debt as possible so you can avoid higher interest rates on your debt when the introductory period expires.
4. Make card payments on time
One of the best things you can do for your credit score is to make on-time debt payments. Even meeting the minimum payment counts as a positive towards your credit score, although the best option is paying off your entire balance in full each month.
5. Know when your interest rate will increase
After the introductory period ends on a new card, your interest rate will go to the standard rate. Your unpaid balance will then be subject to this higher rate—which can drive your monthly payments higher. Before you commit to a new balance transfer card, understand the exact APR when the introductory rate expires and how long that the introductory rate period lasts.
Balance transfers and your credit score: weigh all of the factors
If you use a balance transfer to make on-time debt payments and reduce your overall balance, your credit score can be positively impacted. Still, applying for multiple balance-transfer cards—or adding to the utilization on one of your existing cards—can potentially hurt your score. Employ balance transfers intelligently to maximize their impact on your credit.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
Citi and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Citi and Fair Isaac do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating.
FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.