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:
- 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.
- 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.
- 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.
- 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.