How Credit Card Balance Transfers May Affect Your Credit Score
Do Credit Card Balance Transfers Affect Your Credit Score?
New credit card offers or credit card balance transfer offers are as common as weekly mailers from the local grocery store. Most of these offers are (or should be) shredded and discarded without a second thought, but people who've maxed out their current credit cards might see a balance transfer offer and wonder whether opening a new card and making a credit card balance transfer could help them shore up their financial situation. Like so much else in the credit industry, the answer to that question depends entirely on individual circumstances, especially the "fine print" details of the specific credit card offer.
What is a credit card balance transfer offer?
Credit card balance transfer offers are designed — in theory, anyway — to help you pay off mounting credit card debt by transferring your bills to a new low (or even "zero") percent interest credit card. And these pre-approved offers are available to virtually anyone with a mailing address and a Social Security number.1 So what's the catch? Well, for a savvy consumer who can make regular on-time payments, there may not be one — especially since it allows you to pay off your credit card balance with little or no interest.
Read the fine print on credit card balance transfers
Many financial experts are in favor of using credit card balance transfers as a means of reducing overall credit debt, but the practice does come with caveats. For example, some banks may charge a fee that is actually a hard percentage of the balance amount transferred. If you transfer several thousand dollars to a new credit card with well-hidden finance charges, you could end up paying a few extra hundred dollars in fees alone. To avoid such unwelcome surprises, make sure there's a cap on the transfer charges (let's say $50 or $75, dollars regardless of the amount of the transfer), and double-check with the bank issuing the credit card that they don't charge you a high annual or joining fee.1
How might balance transfers affect my credit report and score?
Think of your credit score in terms of the percentage of available credit you have, that is, the proportion of approved credit that you haven't used yet. The less credit you actually use — that is, the more proof you offer that you can live within your established means — the better it is for your credit history. If you feel the need to carry multiple credit cards (let's say more than two at a time), it's okay to keep them "open," but it is important to keep the balances low — or maybe even at zero if you can.
One or two balance transfers between two different credit cards won't affect your credit score, but too many transfers amongst a host of different cards might look like you can't pay your bills. And that could add up to a black mark on your credit report.
Again, it's important to read the fine print and between the lines of any offer or contract, including those from credit card companies. Moving a large balance from a high-interest card to a lower-interest card seems like a no-brainer, but you need to read the new card's terms and conditions carefully, and use a finance charge calculator to see whether your short-term gain could lead to long-term pain.
It's not the balance transfers that hurt ... it's the credit inquiries
There's one more important thing to consider when it comes to how you use your credit cards. Remember that you get an automatic inquiry placed on your credit report every time you apply for a new credit card. And too many credit inquiries will definitely lower your credit score. If you are responsible with credit balance transfers, though, you could save money in the long run. Just don't overdo it. And while you are using those credit balance transfers wisely, consider this when it comes to your overall credit: Lenders and banks alike are more likely to view you as a responsible borrower if you have older accounts that are in good standing, which offer long-term proof of your ability to pay off debt. And you may even be in a position to get lower interest rates on your then-current card if you hint that you are considering taking your credit card business elsewhere.