Overview

A common concern for people considering balance transfers is how a balance transfer will affect their credit score.  I wrote a detailed article on balance transfers and credit scores recently, but ultimately, there is no concrete answer to this question.  Nevertheless, there are a few general rules a person can follow to limit any negative effects a balance transfer could have on your credit score and even improve your credit score.  First, however, we’ll start with the negatives.

How to Hurt Your Credit Score with a Balance Transfer

1. Close your other credit card accounts:  30% of your FICO credit score is based on your credit utilization ratio.  Put simply, this is the amount of available credit you are using.  For example, if you have a $10,000 credit limit and $2,000 of credit card debt, your credit utilization ratio is 20%.  This would positively impact your credit score, as it shows you are nowhere near maxed out.  On the other hand, if you had a $10,000 credit limit and $8,000 in credit card debt, your credit utilization rate would be 80%.  This would lower your credit score, as you would appear to be maxed out.  Thus, unless you are paying an annual fee, don’t close your credit card accounts after you transfer balances.
2. Close your other credit cards, part two:  Yes, I am repeating myself, but there’s another thorny issue with closing your credit card accounts.  This issue related to your overall credit history as closing accounts you have had for a long time will effectively shorten your credit history.  For example, if you close your oldest account which you have always paid on time, you will lose much of the positive impact that account has on your credit score.  Closing newer accounts has less of an effect, but can impact your score as well.

Other Credit Score Considerations

Call me redundant, but the main way you can hurt your credit score is by closing accounts.  Don’t do this.  Seriously.  With that said three times, another way balance transfers hurt credit scores is the minimal impact applying for a credit card has on your credit.  While there is no tried and true measure, and everyone’s situation varies, the general consensus is that applying for a credit card knocks about 5 points off your credit score.  This is a short term effect, and is often vastly offset by the benefits accrued by reducing your credit utilization ratio if you are approved and granted new credit.

Can Balance Transfers Help Your Credit Score?

This is a tricky question, which really can’t be answered definitively because of the dynamic nature of everyone’s scores as well as the secrecy that shrouds credit score formulas.  I’ve made attempts to get to the bottom of this issue by utilizing free credit report offers that allow you to project the effects balance transfers have on your credit scores (you can find information on free credit score tools here.)  Utilizing my own situation, doing a balance transfer actually increased my credit score by about 5 points.  However, I must stress, everybody’s situation is different.

Final Considerations

0% balance transfers can save people hundreds, if not thousands of dollars in interest over the course of a single year, while reducing the time it takes to get out of credit card debt substantially.  In most cases, the benefits of a balance transfer will massively outweigh any negative impact on your credit score.  Thus, unless you plan to apply for a mortgage or car loan in the very near future, you should stop worrying about your credit score and start focusing on getting out of credit card debt.

For additional information on tools you can use to analyze how balance transfers affect credit scores, please visit the free credit score section of this website.

To estimate how much money you can save with a balance transfer, try out our balance transfer savings calculator.

Or, if you’re ready to start saving money today, visit the 0% balance transfer section of this website to compare offers and apply online.

1. Michelle Landron Says:
   June 18th, 2009 at 9:36 am

   How can you utilize a balance transfer transaction to get cash instead of doing a cash advancement?

2. Balance Transfers Helper Says:
   June 20th, 2009 at 6:22 pm

   Credit card companies do send balance transfer checks, but if they are not sent to a credit card company, they will in all likelihood be treated as cash advances and be charged an extremely high interest rate. Thus, there really is no way to use a balance transfer transaction as a cash advance.

3. Gigi Says:
   June 23rd, 2009 at 12:41 pm

   I’ve gotten around using balance transfer checks as a cash advance without it being treated as a cash advance. You can make a deposit into your checking or savings account with a check made out to your bank, it doesn’t have to be made out to yourself or cash. In this way, it could appear that you are paying a bank that you may or may not have a credit card with.

4. Balance Transfers Helper Says:
   June 25th, 2009 at 9:14 am

   Gigi,

   That sounds like a dangerous game. I see how making the check out to the bank may trick the credit card company into thinking you’re paying off a balance transfer, but its a very risky move these days, especially given the fact that a cash advance rate is usually 30%

5. Gigi Says:
   June 26th, 2009 at 12:42 pm

   I completely agree with you. Back in the day when balance transfer fees were capped, if you had more than a couple of transfers to make this trick could potentially save you a few hundred dollars by making only one transfer and doling out the money from there. Also, interest rates weren’t so outrageous then so it didn’t seem like such a great risk. Certainly, everything is way too volatile right now to chance it.