Do Balance Transfers Hurt Your Credit?

If you've got multiple active high-interest credit cards or loan accounts, you might have considered a balance transfer. But before you decide on it, a question to ask yourself is - do balance transfers hurt your credit? 

Even though in some situations, such as when you have too many open accounts and want to consolidate debt, a balance transfer may seem like your best bet, it's imperative to consider the repercussions it can have on your credit.

Now, the first thing you need to know if you're looking for an answer to 'Do balance transfers hurt your credit score', is that when a balance transfer affects credit rating, it isn't always negative. This means that if you approach the process responsibly, a balance transfer may even help improve your credit. Not to mention that you need to meet the set minimum credit score for balance transfer to even qualify for it. 

Let's take you through a quick guide about balance transfers and help you understand how balance transfer affects credit rating. 

What Is A Balance Transfer?

To spell it out, it's basically the process of moving debt from a credit card, loan, or multiple accounts to another credit card.

Now, why would one even do this? Credit card companies often run promotional offers featuring 0% or low APR for a limited time (typically 12-21 months) on balance transfers. So, that is usually one of the prime reasons people choose to do it. Additionally, let's go over various scenarios in which one might opt for a balance transfer. And you'll also get the answer to 'Do balance transfers hurt your credit?'

How Balance Transfer Affects Credit Rating In Different Scenarios

Scenario	How It Goes	Impact on Credit
High-Interest Credit Card Debt	Transferring balances from high-interest credit cards to a card with a lower interest rate.	Short-term: May lower credit utilization if paid down. Long-term: Improved credit history can boost score.
Consolidation of Debt	Using a balance transfer to consolidate multiple debts into one card for easier management	Short-term: May lower average account age. Long-term: Can improve score with consistent payments.
Avoiding Late Fees	Transferring a balance to avoid missed payments or late fees on accounts.	Short-term: Can prevent late payments from negatively impacting credit. Long-term: Payment history remains positive.
Introductory 0% APR Offers	Transferring balances to take advantage of promotional 0% APR offers.	Short-term: May lower credit utilization. Long-term: Can lead to debt reduction if managed properly.
Emergency Fund Usage	Transferring debt to preserve emergency funds for unexpected expenses.	Short-term: Could lower credit score if utilization rises. Long-term: Keeping debt manageable helps maintain score.
Switching to Rewards Cards	Transferring balances to a credit card that offers rewards or cash back benefits.	Short-term: May lower average account age. Long-term: Consistent payment behavior can enhance score.
Financial Hardship	Transferring balances as a strategy to manage debt during a financial crisis.	Short-term: Can lead to missed payments if not managed.  Long-term: Recovery can improve credit if debts are addressed.
Account Closing	Closing an old account after transferring its balance to a new card.	Short-term: May decrease credit score due to reduced available credit. Long-term: If utilization improves, the score can recover.

How Balance Transfer Affects Credit Rating Aspects

Credit Aspect	Impact of Balance Transfer
Credit Utilization	Transferring debt to a card with a higher limit can significantly decrease your overall credit utilization ratio, which is beneficial since lower utilization is viewed positively by lenders.
Credit Inquiries	Applying for a new credit card for the balance transfer typically results in a hard inquiry on your credit report. This can cause a temporary dip in your credit score but is often short-lived if managed well.
Account Age	If you transfer a balance to a new card, it may lower your average account age, which can negatively impact your score. Maintaining older accounts open helps preserve your credit history length.
Credit Mix	A balance transfer can diversify your types of credit (e.g., revolving credit from different cards). A varied credit mix can positively influence your credit score, as it demonstrates your ability to manage different types of debt.
Payment History	Successfully making on-time payments on the new card can enhance your payment history, which is a significant factor in credit scoring. A positive payment history contributes to a higher credit score over time.

Let’s go over 2 examples.

Example 1: When A Balance Transfer Can Actually Improve Your Credit

Suppose you have a balance of $5,000 with an interest rate of 20% in Credit Card A. And a credit card company extends a promotional offer with a 0% introductory APR for balance transfer and a high credit limit on Credit Card B.

How does this impact your credit score?

Once the balance is transferred to Credit Card B, your utilization rate decreases significantly, considering you now have a higher credit limit. This can positively impact your credit. Additionally, with the 0% APR, you can focus on paying down the principal amount without accruing interest. By making on-time payments, you can build a positive credit history. Besides all this, by possessing multiple types of credit (revolving credit from different cards), you diversify your credit mix, which influences your credit score calculation for the better.

Overall, in such situations, a balance transfer affects credit rating positively.

Example 2: When the Answer to ‘Do Balance Transfers Hurt Your Credit?’ Is Yes

Presume you have Credit Card A with a balance of $5,000 and interest rate of 20%. You apply for a new credit card to transfer the balance but are denied due to your credit score being impacted by high credit utilization. Yes,  there’s a minimum required credit score for balance transfer. 

How does this impact your credit score?

Each time you apply for a new credit card, a hard inquiry is made on your credit report. In this case, being denied for the balance transfer means you’ve taken a hit to your credit score without the benefit of reducing your interest burden. Additionally, being denied for a new credit card means you still carry the $5,000 balance on Credit Card A, maintaining your high credit utilization rate. This continued high utilization not only impacts your credit score but also signifies financial stress to potential lenders, making it harder for you to qualify for other forms of credit or loans in the future. That’s not all, without the balance transfer, you still have to pay 20% interest on the $5,000 you owe. This means larger monthly payments and longer pay off time. 

What Is The Minimum Required Credit Score for Balance Transfer?

At least 670 or more. Yes, a balance transfer card, just like any other card, you'll need at least a good or excellent credit score for approval. The exact minimum required credit score for balance transfer depends on the credit card company or lender. So, be sure to check in about it before applying. 

5 Questions to Ask Yourself Before Opting for a Bank Transfer

Do I really need to make this transfer?

• Evaluate if the transfer is essential or if there are alternative methods.

Have I verified the recipient's details?

• Double-check the account number and other details to avoid errors.

What are the transfer fees and charges?

• Understand any costs involved to avoid unexpected expenses.

Is this transfer secure?

• Ensure that the bank's transfer process is safe and protected from fraud.

What are the transfer limits and processing times?

• Check any limits on transfer amounts and how long it will take for the funds to reach the recipient.

Balance Transferred, What's Next?

Once your balance is transferred, prioritize managing your new credit balance to edify your credit score. Here's are a few things to keep off the top of your head: 

• Create a realistic repayment plan.
• Monitor your credit utilization ratio.
• Set up automatic payment reminders.
• Avoid accumulating new debt.
• Regularly review your credit report.

Keep Your Credit Balance in Check From the Get Go With CoolCredit

More often than not, individuals opt for balance transfers due to mismanagement of their current credit balance and credit utilization ratio. Now that you know the answer to ‘Do balance transfers hurt your credit?’ is ‘potentially’, keeping your balance in check should, without a doubt, be your priority.

How Do You Do That?

By monitoring your credit using an app like CoolCredit. Again, keeping tabs on your credit score and report is important to manage your credit balance, especially your utilization ratio. And through CoolCredit’s comprehensive credit monitoring service, you can always stay on top of your credit health. Not only can you stay in the know of your credit usage and make responsible financial decisions, you can also identify errors in your report and dispute them promptly. This will ensure your report accurately reflects your credit usage and health to lenders. Additionally, it can alert you to any suspicious activity, helping you catch potential identity theft early.

Conclusion

Balance transfers can be a strategic tool for managing debt and potentially improving your credit score if approached responsibly. While they offer benefits like lower interest rates and consolidated payments, it's crucial to understand the potential risks and impacts on your credit. Always evaluate your financial situation, check your eligibility, and plan your repayment strategy carefully. With diligent management and tools like CoolCredit to monitor your credit health, you can make informed decisions that support your financial goals.