Do balance transfers hurt your credit score?

When you’re paying double-digit interest rates on one or more credit cards, a balance transfer can make it easier to tackle that debt. But even though you’ll save money on interest, one of the drawbacks is the short-term impact a balance transfer could have on your credit score. In the long term, getting a balance transfer credit card can be a huge help if you use it responsibly — giving you a chance to dig yourself out of debt without paying interest for a time. Plus, increasing your available credit with a new balance transfer card could improve your credit utilization ratio and, consequently, your credit score. Initially, however, a balance transfer can temporarily lower your credit score.

How a balance transfer harmed my credit score

If you’re considering a balance transfer to make a serious dent in your debt, then knowing what the potential downsides are is important. And one of those disadvantages is the temporary hit to your credit score. Having performed two different types of balance transfers myself, I’ve witnessed those changes to my credit score firsthand since I track my credit score religiously using these free credit monitoring services:

• Experian credit monitoring
• CreditWise
• MyFICO

Over time, those balance transfers helped raise my credit score since their effects spanned multiple credit scoring factors. By sticking to my payoff plan and avoiding the temptation to use up my newly available credit, that initial dip in my score was only a short-term drawback. Still, here are the causes of a possible drop in your score related to opening a balance transfer card.

1. Your score will drop when you apply for a balance transfer card

Every time you add a new credit card to your wallet, it affects your credit score. When you apply, the card issuer runs a hard inquiry on your credit report which shaves off up to 10 points from your score. When I applied for my balance transfer credit card, that hard inquiry only took about three points from my score since I had no other recent inquiries. That inquiry then stays on your report for up to two years, but the penalty usually fades away within a few months. So applying for a bunch of credit cards at one time is not a wise move. Instead, you can check your approval odds before applying for a new card to preserve your credit score and find the best balance transfer cards for you. You can seek preapproval by going directly to the issuer’s website or by using a third-party tool, like Bankrate’s CardMatch, which gives you personalized preapprovals for a variety of cards without impacting your credit score.

2. Your score may drop due to your new average length of credit history

Once you get a new card, your score will likely experience another temporary dip because your credit score is partly based on the average age of your credit. If you’ve had one card for four years and another card for six years, the average age of your credit is five years. But when you add a new card to this scenario, the average length of your credit history will go down to a little over three years. For me, that didn’t have as large an impact on my score since I already had an average credit history of about 12 years at the time across several accounts — so a new card was just a drop in the bucket.

3. Your score might drop if your per-card credit utilization ratio is too high

This is where I saw the largest hit to my credit score after performing my balance transfers. On my first balance transfer, I was concerned after I didn’t get as high of a credit limit as I had hoped for. After years of experience working in the banking world, I knew going into it that increasing my per-card utilization — that is, running up a balance on individual cards — would severely drop my score even if I was doing it for a balance transfer. Your credit utilization ratio makes up 30 percent of your FICO credit score and tells the credit reporting agencies how responsible you’re being with your open credit. So even if it decreases overall by adding a new card, transferring all your debt to that new card will undoubtedly raise your per-card utilization rate. Still, I only qualified for $4,800 and I decided to transfer $4,000 — making my credit utilization for that card 83 percent. Despite a super high per-card utilization ratio and the damage to my score of over 20 points, I didn’t let the initial shock override my payoff plan by focusing on what I knew would happen next:

• Paying no interest on the balance transfer meant that ratio would only be high temporarily. Within eight months, my utilization for that card was down to 50 percent.
• After using a balance transfer calculator, I knew I would save over $1,100 in interest charges.
• I could pay down the balance much faster since I wasn’t paying interest.
• I knew I wasn’t applying for other credit or loans anytime soon.

It’s generally recommended to keep your credit utilization ratio under 30 percent. But when the choice is between a short-term drop to my score versus the multiple long-term benefits to paying off high-interest debt, I’m personally going to choose the debt payoff. It helped that my credit score was already in the 720s, so I could deal with sacrificing a few points.

4. If you don’t follow through with the balance transfer plan.

Performing a balance transfer is just one piece of the equation in paying off your debt. If you botch the process, that could land you deeper in trouble than before you transferred your balance and leave your credit score hurting. Ahead of applying for my balance transfer card, these are the steps I took to make sure it would be successful:

1. Scoped out the best balance transfer cards.
2. Checked my credit and prequalified for my top cards.
3. Ran my budget to know how much of a monthly payment I could afford.
4. Set up an auto payment for the amount I needed to pay every month.
5. Took the card I just paid off out of my wallet and shoved it in the back of a drawer so I wouldn’t use it anymore.

Having a solid plan in place to pay off my debt meant that the hit to my score was easily overshadowed by the beautiful zero balance on my old card and the boost to my credit score in the long run. But beyond some of the unavoidable drops related to applying for and then using a balance transfer card, you can hurt your credit further when you don’t use the card responsibly or fail to stick to a payoff plan. Avoid these balance transfer blunders to keep it from hurting your credit score more:

• Running up the balance again on the card you just paid off.
• Making late payments on your balance transfer card and getting hit with a penalty APR and fees.
• Making only minimum payments on your balance transfer.
• Using the new card while you’re trying to pay off the balance.

How balance transfers can improve your credit score

After the initial sting of getting a balance transfer credit card and transferring a balance, it can be satisfying to watch your credit score climb back up even higher than what you started with. At the beginning of my journey, my score was in the 720s and dropped as low as 690. Once I paid off the balance transfer, my credit score hit 757. Your credit score can improve with a balance transfer in the following ways:

1. Your score could rise with lower credit utilization

When your credit utilization rises, your credit score can fall. The reverse also happens: Your credit score can rise as your credit utilization falls. That was true for my credit score even before paying off the balance transfer in full since adding a new card also gave me more available credit. As I made progress toward paying off the balance transfer, I got email alerts from my credit monitoring services congratulating me as my utilization decreased. That’s when I’d notice my score jump up a few more points each time. By the end of the first year, my credit score was back up to the 720s from its low of 690. These other efforts helped alongside consistently paying off chunks of debt:

• I made no new charges on the balance transfer card or my old credit card.
• I maintained a 100 percent on-time payment history.
• I updated my income with all my card issuers to secure automatic credit limit increases.

Remember, most experts recommend a credit utilization rate of no more than 30 percent, although consumers with excellent credit usually have a credit utilization in the single digits.

2. You have a debt elimination strategy that pays off

Committing to a debt elimination strategy certainly helps you pay off your balance transfer within the introductory period while making significant progress toward your goal. Although the word “strategy” makes it seem complicated, all I did was some simple math. I divided my total balance by the number of months I had on my balance transfer offer. My balance transfer fee was five percent, or $200, which left me with a total of $4,200 to pay off. I had a 0 percent introductory APR for 21 months. So $4,200 divided by 21 was $200 each month. Then I set an automated payment to the card every month for $200 until it was paid off. If you have more debt than can be paid off with one balance transfer, a payoff strategy can also keep you focused and help you build momentum. Consider a strategy to target your efforts on demolishing one debt at a time:

• List all your debts by balance and interest rate to prioritize them.
• Use the snowball (paying off the smallest debt first, regardless of interest rate) or avalanche (paying the highest interest rate debt first, regardless of debt amount) methods.
• Pick up a side hustle for added income toward debt pay down.
• Get a debt consolidation loan.

Whether you choose to use one or multiple of these strategies to pay off debt, your credit score will ultimately be better for it if you stick to the plan.

Is it worth it to transfer a balance?

A balance transfer should make paying down debt easier, not harder. It’s not a good idea to transfer debts to a new balance transfer credit card if:

• You plan on adding even more debt to it by charging purchases to the card regularly.
• You’re not confident that you can pay off all or at least most of your debt before the card’s introductory annual percentage rate (APR) period ends.
• You haven’t addressed the bad money habits or cash flow issues at the root of your credit card debt.

If your balance transfer card has an introductory 0 percent APR period (usually between 12 and 21 months), you should be able to pay down debt faster and with less effort since you won’t have to worry about interest charges compounding monthly. Every payment will go toward your principal balance if you take full advantage of the 0 percent intro APR period. But, if you can’t pay off your balance before that period ends, you could find yourself paying high interest on that debt once again; in fact, the ongoing APR on your balance transfer card could be even higher than the APR on the card from which you moved the debt. In general, balance transfers make sense for consumers who:

• Have a lot of high-interest debt to pay down.
• Can get approved for a new balance transfer credit card.
• Have a plan in place to pay off that debt before the end of the card’s introductory 0 percent APR period.

It’s also important to keep in mind that balance transfer fees of 3 percent to 5 percent with minimum fees apply to most balance transfer card offers. So, if you’re transferring a balance of $7,000, a 3 percent fee would add $210 to your total balance to pay off. But if you pay down your total balance during your 0 percent intro APR period, a 3 percent fee is a small amount compared to the amount you would have paid in interest on another card.

The bottom line

Balance transfers will not make debt disappear, nor will they erase any information on your credit report that’s associated with the account you transferred the balance from. Balance transfers also won’t force you to change the spending habits that allowed the debt to accumulate in the first place. But, when used properly, they can be great tools for avoiding high interest while you pay down your debt. The small drops in your score that result from obtaining the balance transfer card should be short lived if you handle the card responsibly. When deciding whether to apply for a new card with a balance transfer offer, consider what spending patterns you’re able and willing to change. If you think you’re a good candidate for a balance transfer card, and if you get approved for one, make a debt repayment plan to help you pay it all off before the 0 percent intro APR period expires.