Do Balance Transfers Hurt Your Credit Score?
Credit cards that feature 0% APR promotional balance transfers offer you the opportunity to save a substantial amount of money on interest charges. And by transferring an existing balance to a new credit card that has interest-free financing, you can even pay down your balance faster.
The biggest issue that most people fear is that a balance transfer will hurt their credit score. Thankfully, this is not the case and in fact, performing a balance transfer may even help your credit.
How balance transfers affect your credit score
Determining whether a balance transfer will hurt your credit score is not a simple matter. First, applying for a new credit cards and being approved will affect your credit score, and usually for the better. A new application for credit will result in a hard inquiry on your credit file, also known a hard pull. By itself, a single hard pull will have a negligible effect on your credit, but having many recent new applications for credit can result in a small, but significant drop in your credit score. Thankfully, this effect is both minor and temporary.
On the other hand, being approved for a new line of credit can help your credit score in two ways. Having a new line of credit will reduce your debt to credit ratio for a given amount of debt. Your debt to credit ratio, or debt utilization, is the sum of your outstanding balances divided by the total amount of credit you have been extended. Increasing your credit extended reduces your debt to credit ratio, helping your credit score.
In addition, having an additional line of credit open and in good standing will help to increase your credit history. This is especially important for people with limited credit histories such as young adults, recent immigrants, and those who have chosen to avoid credit in the past. And in the end, performing the balance transfer itself will not affect your credit as your total amount of debt will remain virtually the same; it will just be held by a different card issuer.
But perhaps the most important way that a balance transfer can help your credit is by enabling you to pay off your debt sooner. With 0% APR offers for balance transfers, 100% of each month’s payment goes to paying off your principal, not interest charges. In addition, many cardholders make a goal out of paying off their balances before the promotional financing period expires, which helps them focus on paying off their debt sooner. Finally, cardholders who are able to consolidate multiple balances can make fewer payments each month, reducing the chance of making the costly mistake of missing a payment.
The total effect
So on one side, you have the potentially negative effect of a new credit inquiry, although slight. This effect will not make a difference for most applicants, unless they have already been applying for several credit cards in a short period of time. But even then, the positive effects of a lower debt to credit ratio and an increased credit history will easily outweigh any negative impact of an additional credit inquiry.
It is critical to focus on achieving the larger goal of lowering your debt, which is a far more important factor in your credit score than the number of recent inquiries. If a promotional balance transfer helps you to lower your debt faster than you would have otherwise, its effect on your credit score will be overwhelmingly positive. And when you consider all the interest charges you will be saving, the argument for balance transfers is very strong. Cardholders are right to take their credit scores very seriously, but they should be relieved to learn that promotional balance transfers are more likely to help their scores than to hurt them.
Some of the top balance transfer credit card offers:
The Chase Slate card is the only balance transfer offer from a major issuer that features an introductory offer of 0% APR financing for an extended period of time and no balance transfer fee. New applicants enjoy 15 months of interest free financing on both new purchases and balance transfers, with no fee for qualifying transfers made within 60 days of account opening. There is no annual fee for this card.
This offer for the Discover it card features 18 months of interest free financing on balance transfers, with a 3% balance transfer fee. In addition, this offer includes six months of 0% APR financing on new purchases. You also receive 5% cash back on up to $1,500 spent each quarter on qualifying categories of purchases and from featured retailers, and 1% cash back on all other purchases. There is no annual fee for this card.
The Chase Freedom card features an introductory offer of 15 months of interest free financing on both new purchases and balance transfers, with a 3% balance transfer fee. Freedom also offers 5% cash back on up to $1,500 spent each quarter on qualifying categories of purchases and from featured retailers, and 1% cash back on all other purchases. There is no annual fee for this card.
The Capital One Quicksilver card is offering 15 months of 0% APR financing on both new purchases and balance transfers, with a 3% balance transfer fee. In addition, cardholders receive 1.5% cash back on all purchases with no limit. There is no annual fee for this card.