Balance Transfers and Credit Scores

How do balance transfers effect credit scores? There is, unfortunately, no clear answer to this question other than, “it depends.” The reason the only true answer to this question is a non-answer is due to the dynamic nature of credit scores and the multitude of factors taken into consideration. However, it is possible to improve your credit score when you do a 0 balance transfer if proper steps are taken. Conversely, it is also possible to hurt your credit score with a balance transfer, especially if certain, but avoidable actions are taken.

Before we review credit score scenarios, let me point out a two major DON’Ts:

  1. DON’T Close the Credit Card you Transfer Your Balance From: When you close or cancel a credit card account, there are a number of negative repercussions because it reduces the amount of overall credit available to you. Thus, to a lender, it will appear as if you are using more of your available credit, a heavy factor in credit score calculations.
  2. Once Again, DON’T Close the Credit Card Account You Transfer Your Balance From: If you close a credit card account you have had for a long time, it will remove an active account with a history from your credit report. This is also a big negative, especially if the account you are closing is one of the oldest in your plastic collection.

Now that we know the don’ts, lets take a look at the positive affects a balance transfer can have using data drawn from a free credit monitoring service.

  1. Consolidate high interest balances onto a new credit card AND keep the old credit card open: In this scenario, $1200 in debt is transferred to a new credit card with a $5000 credit limit. According to the score estimator, this would improve the example’s credit score by an average of 3 points, with no effect from one company, a 2 point increase from another, and a 7 point improvement with the third credit bureau.
  2. Consolidate most of your high interest balances AND pay off some of your debt: In this scenario, we factored in applying for and getting approved for a new credit card with a $5,000 limit and paying down about 20% of the debt. Surprisingly, the effect was similar, with a projected 2 point credit score increase.

As you can see, balance transfers, when executed correctly, can have almost no effect, if not a slightly positive effect on credit scores. However, it must be stressed that individual results can vary dramatically.

Consequently, if you are concerned about how a balance transfer will affect your credit score, you should strongly consider using a free credit monitoring trial that includes a credit score estimator. However, unless you need to use your credit score for an upcoming mortgage application, refinancing or car loan, maintaining a high credit score should be put on the back-burner since not doing a balance transfer can cost hundreds of dollars in interest expenses that are truly unnecessary unless having a higher credit score will pay off in another area.

For more information and to apply online for a balance transfer credit card, please see the 0% APR balance transfers section of Smart Balance Transfers.