If you are considering transferring your high interest credit card debt to a low interest balance transfer offer to pay your debts faster and save money, you should also take into consideration the impact a balance transfer has on your credit score. While normally a financially smart move, if you aren’t careful, credit scores can actually be negatively affected when you apply for a new balance transfer credit card due to FICO’s method of calculating credit scores.
The actual formula for calculating an individual’s credit score is not revealed to consumers, but we do know about how much each aspect of the credit score calculation plays a role in our overall score. Here are the components:
* Payment History – 35%
* Outstanding Debt – 30%
* Established Credit – 15%
* New Credit – 10%
* Type of Credit – 10%
In the calculation of credit scores, the biggest factors involve your history of making payments and how much debt you carry. How long you have had credit is factored into your score, too, as is the frequency with which you apply for new credit and the type of credit you have.
When thinking about doing a 0 balance transfer and how it will affect your credit score, you should take into consideration how closing a credit card will reduce your available balance and the age of your credit. If you close your old account, you reduce the amount of available credit you have, which negatively affects the percentage of debt to available credit ratio.
Doing this increases your debt relative to your available credit – and you haven’t even spent more money. Because this is 30% of your credit score calculation, closing old credit card accounts after a balance transfer is not a good idea. Strongly consider keeping the old cards open, even if you have no intention of using the cards, though you may want to reconsider this if and only if the card is charging you an annual fee.
The impact of doing a 0% APR balance transfer on your credit score may not always be negative and could actually be positive. This is due to the inverse of the problem caused by closing accounts, since if you are accepted for a new credit card, your available credit increases and your debt stays the same. The impact this will have on your credit score will vary, but over time, the new credit card you use for balance transfers may actually be quite beneficial to your score.
Ultimately, however, if you are spending hundreds of dollars a year in interest – which is very easy if you have $3,000 of debt at a 15% rate, since that can cost about $450 a year – then saving money with a 0% APR balance transfer is more important than losing a few points on your credit score as long as you are not planning to apply for a mortgage or car loan in the immediate future.
