How does a balance transfer affect your credit score?

A balance transfer, where you move debt from one credit card to another, can be an effective strategy to deal with mounting credit card debt. Typically, you move the debt from a high-interest card to one with a 0% introductory APR. But how does this impact your credit score? Handled responsibly, it can help your credit score. Handled poorly, it can damage your score instead.

For example, opening a balance transfer credit card and then running up new balances on your old card or cards is a big pitfall to avoid. We’ll walk you through how a balance transfer can affect your credit and help you decide if a balance transfer card is the right financial tool for you.

How a balance transfer can help your credit score

The amount of credit card debt you owe, and more specifically how your credit card balances relate to your credit limits, is one of the most important factors determining your credit score. Put simply, a lower credit utilization ratio is better for your score. Opening a balance transfer credit card can reduce your overall utilization, as long as you don’t pile up debt on your old cards — or your new balance transfer one by making new purchases in addition to transferring debt.

For example, if you have just one credit card with a $3,000 limit and you’re carrying a $2,000 balance, that’s close to 70% utilization. But, if you open a balance transfer card and are granted a $4,000 limit, you’re now under 30% utilization overall (as long as you don’t add more debt).

With FICO, the credit scoring method typically used by lenders when deciding to extend credit to you, credit utilization makes up 30% of your credit score. Only payment history, weighted at 35%, is more important in keeping a good credit score.

Just beware, utilization is calculated both across all your credit card accounts and for each individual account. This means even if your overall utilization is low, but a particular account is close to maxed out, that could still hurt your credit score. 

You’ll likely have high utilization on your balance transfer card initially due to transferring a large amount of debt, but going forward, it’s smart to keep utilization on all accounts low by paying in full each month.

Curious how good your credit is? Here’s what the highest credit score is.

That said, a balance transfer is not the only way to reduce your utilization. You could also pay off your credit card debt with a debt consolidation loan. Because personal loans are installment credit, not revolving credit like credit cards, such a loan won’t count toward your utilization.

How a balance transfer can hurt your credit scores

Like any other account on your credit reports, the way a new balance transfer card affects your credit scores comes down to how you manage the account. Like any credit card, you need to make at least the minimum payment on time. 

A balance transfer could hurt your credit scores if you continue to overspend after consolidating your debt. At first, transferring your balances to a new account should reduce your overall (also known as aggregate) credit utilization rate. But if you turn around and charge up new balances on your original credit cards, your aggregate credit utilization rate will climb again. 

Applying for your balance transfer card can add a hard inquiry to your credit reports, which can knock a few points off your scores for a short time. It’s also worth noting that any new credit account — balance transfer credit card or otherwise — may reduce your average age of credit, which can cause your scores to drop. 

However, if you don’t make a habit of opening new accounts frequently, the effect of this shortened length of credit history should recover over time as well. 

What to do after a balance transfer

After a balance transfer, it’s important to make sure you’re following good habits when it comes to managing all of your credit card accounts. 

• Stick to a plan. Before opening a new credit card and performing a balance transfer, calculate how much you must pay each month to zero out the full amount of debt before the promotional period ends. After the transfer, stick to the plan, or you’re just kicking the can down the road. You’ll accrue interest on any remaining balance at the regular APR once the 0% period ends.
• Pay on time. Payment history is the most important factor that influences your FICO and VantageScore credit scores. It’s critical to pay your credit cards (and all of your other credit obligations) on time if you want to build and keep good credit scores. 
• Don’t make charges on your new card. It’s best to focus on paying off transferred debt rather than making new purchases on the balance transfer card. Plus, some cards offer an intro APR on balance transfers but not purchases. If you use your balance transfer card to buy something and carry a balance over into the next month on that purchase, you could owe interest on that balance, even if your balance transfer still isn’t accruing interest. This complicated accounting means it’s best to use the balance transfer card for its main purpose.
• Avoid carrying a balance on your old cards. If you continue to use your old card or cards for everyday purchases, make sure to pay them off in full each billing cycle. Not only is this a good practice so that you don’t get stuck in a cycle of debt, it also helps you avoid interest charges thanks to your credit card account’s grace period.
• Pay extra, if possible. Examine your household budget. If you can find ways to cut expenses or increase your income, consider paying the resulting extra money toward the debt you consolidated with the balance transfer. The less remaining debt you have when the 0% APR period wears off, the more money you can save. If you can pay off the full debt before the promotional period ends and avoid interest entirely, that’s ideal.

Reasons to do a balance transfer

The biggest reason to do a balance transfer is often to save money. Consider that the average credit card interest rate (for accounts accruing interest) was 20.92%, as of February 2023, according to the Federal Reserve. A balance transfer card with a 0% intro rate can give you a chance to pay down your debt while avoiding high-cost interest charges.

While balance transfer cards typically charge a balance transfer fee of 3% to 5% of the amount transferred, you can likely still save money with a balance transfer compared to the interest you’ll pay on your debt.

Doing a balance transfer can also consolidate debt from multiple cards, simplifying your situation so that you have one monthly payment to keep track of instead of several.

Is a balance transfer worth it?

Most credit cards will assess a balance transfer fee of 3% to 5% of the amount you transfer to your new account. So, before initiating a balance transfer, it’s important to crunch the numbers and make sure that doing the transfer makes sense for your situation. For example, transferring a $2,000 balance to a card with a 0% APR offer and a 3% balance transfer fee would cost you $60. Compared to the roughly $185 in interest you’d pay if you paid that balance off over 12 months on a card with a 20% APR, you still end up saving with the balance transfer.

If you owe a small amount of credit card debt, or you’re in a financial position to pay off your debt in three months or less, a balance transfer might not be worth it. A balance transfer may take at least one billing cycle to process. So, if you’re going to pay off your debt within three months, the amount of interest you save might not be enough to offset the balance transfer fee. 

However, if you’re not in a position to pay off your credit card balance in a hurry, a 0% APR or low-rate balance transfer offer could save you substantial money on interest charges. In many cases the potential savings from a balance transfer will far outweigh the cost of 3% to 5% balance transfer fee. But, again, it’s important to calculate your estimated costs to be sure. 

Finally, evaluate if you’re OK opening a new credit card and likely taking a small hit to your score due to a hard inquiry. If not, and you already have more than one credit card account, you may be able to check existing cards for balance transfer offers. For example, Discover makes it easy to look for offers under “card services” in your online account. 

Just be aware you cannot transfer balances between cards from the same issuer. So, if you’re checking an existing credit card for a balance transfer offer, you need to be looking at a card issued by a different bank than the card you want to transfer the debt off of.

Frequently asked questions (FAQs)