Credit card balance transfers can be an effective way to deal with debt. You can take what you owe from various accounts and move it over to a new account with a low introductory interest rate.
For people who plan to pay off the debt, this can be a way to get ahead without being bogged down by high credit card interest rates.
But will this affect your credit?
Here’s how balance transfers affect your credit score.
There’s a bit that needs to be unpacked when determining if a balance transfer will affect your credit score.
In the most basic sense, performing a balance transfer won’t inherently ding your credit. But that’s assuming you’re able to do the transfer without triggering one of the credit score-determining factors.
Here is how each category affects your credit score, according to Experian:
- Payment history (35 percent)
- Credit utilization (30 percent)
- Length of history (15 percent)
- Credit diversity (10 percent)
- New Accounts (10 percent)
Here’s what you should keep in mind:
You’re creating a new credit account when you perform a balance transfer.
New accounts and inquiries on your credit report comprise 10 percent of your overall score. This can be an issue if you have a shorter credit history.
Your credit utilization ratio might be affected when you perform a balance transfer.
Credit utilization is the amount of credit you’re currently using measured against the amount you’re allotted.
When lenders see a higher ratio, it can be a sign you’re getting too deep into debt. The idea behind a balance transfer is that you’re taking the balance from existing accounts and putting it onto a new one with a lower introductory interest rate.
Opening this extra account should actually lower your ratio, as you should now have a higher level of available credit. Closing accounts after transferring a balance out of them, however, can actually end up harming your credit as it can make your credit utilization ratio skyrocket.
Length of history can also be affected when you do a balance transfer.
Opening a new account will lower the average age of your credit accounts. But the more harmful aspect to your credit is if you close your older accounts, as this can drastically lower the length of history on your credit report.
How to Deal with Bad Credit Before or After a Balance Transfer
While there are some pros to doing a credit card balance transfer, there are some definite drawbacks as well.
For instance, if you don’t come up with a realistic plan to pay back your debt, it can actually grow to be much worse once the introductory zero interest period is over.
Another option for debt consolidation with bad credit is to work with a debt relief agency.
Like a balance transfer, you’re taking multiple lines of credit and putting them into a single payment.
Some people, especially those with less-than-perfect credit, will find this route can keep them on track better than a balance transfer.
Why You Should Care about Your Credit
Some people take a hands-off approach to their credit.
While it’s understandable most people don’t want to spend a significant amount of time obsessing over their credit score, that number can have a significant impact .
In addition to determining your ability to borrow money, it influences the terms you’ll be offered when you do get a loan. People with good credit have to pay much less on their debts than those with poor credit.
If you’re thinking about doing a credit card balance transfer in order to pay off your debt, consider the ways you might affect your credit score in the process. Keeping a strong score will make your life much easier in other regards.