Do Balance Transfers Hurt Your Credit Score?

Close-up Of Woman Checking Credit Score Online On Laptop At Home

You may have received an offer for a 0% APR on balance transfers, and you may be tempted to sign up for it. After all, 0% APR will allow you to save money on interest charges, and since you will not be accumulating new interest charges, you can pay off your balance faster.

The only thing holding you back may be that you worry a balance transfer could hurt your credit score. Luckily, this is not the case at all. In fact, a balance transfer could actually increase your score.

Balance Transfers and Your Credit Score

To determine what effect a balance transfer will have on your credit score, you need to consider a number of factors. First, applying for a credit card will affect your score. New credit card applications require a hard inquiry on your credit report, which you may have heard referred to as a hard pull. A single hard inquiry will have little effect on your credit, but if you have applied for many new cards recently, you could see a significant drop in your score. Luckily, the effect is temporary.

If you are approved for the card, your credit score can receive a bump in two ways. First, having the new credit card will reduce your debt-to-credit ratio, or debt utilization, which is the sum of all outstanding balances divided by the total amount of credit. If you have an increased credit line, your debt-to-credit ratio will reduce, which helps your credit score.

Additionally, if you have an open line of credit in good standing, you will increase your credit history, which is especially important for young adults, recent immigrants and those who have avoided credit in the past since these people tend to have a limited credit history.

Also, since performing a balance transfer does not increase your total amount of debt, your amount owed will remain the same. Your balance will just be held by a different card company.

Finally, the most important way balance transfers can increase your credit score is by helping you pay your debt sooner. When you are given 0% APR on balance transfers, your full payment goes toward the principal each month instead of interest charges. It could also help you set a goal to be debt-free before the promotional financing period ends, which will give you motivation to pay off the debt sooner. Another perk is that if you consolidate multiple balances, you can make fewer payments each month, which reduces the likelihood that you’ll make a costly mistake by missing a payment.

The Pros Outweigh the Cons

Assuming the transfer makes financial sense once you factor in the balance transfer fee, the only potentially negative effect that can come from a balance transfer is the new card inquiry, which will result in a hard pull of your credit report. However, this is a small issue for most applicants, unless you have applied for many cards in a short period of time. Even then, though, the positive effects of an increased credit history and lower debt-to-credit ratio will likely outweigh the small negative impact of a credit inquiry.

To improve your credit score, you must focus on lowering your debt, which is much more important than credit inquiries. If a promotional balance will help you decrease your debt faster, the effect on your score will be positive. When you add the fact that you will be saving money on interest charges, the argument for a balance transfer is quite persuasive. It is important to take your credit score seriously, but you must always look at the bigger picture. It is likely that a promotional balance transfer will help you more than hurt you.

About John H. Oldshue

John Oldshue is the creator of BillSaver.com. He worked for over 15 years in television and won an Emmy award for his reporting. He covers credit card rate issues for BillSaver.com.
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