Transferring your existing credit card debt to so-called balance transfer cards can help you save a decent chunk of money on interest charges. These specialty cards allow you to pay down card debt with a promotional interest rate for some length of time. However, before you jump to accept a card offer, you should be aware of the potential risks balance-transfer cards pose for your credit score.
Before We Begin: The Risks (Likely) Don’t Outweigh The Benefits You’ll Receive
You may well decide the risks are worth the reward of getting a card that allows you to pay off your balance at a 0% APR. After all, many of the negative credit implications will be temporary. Even if your credit score slightly decreases, it is sure to bounce back eventually – provided you don’t make any financial missteps. Most credit scores range between 300 and 850, and a balance-transfer credit card may end up decreasing your score by just 30 to 40 points. That is a relatively small price to pay for dispensing with charges on your debt.
You should also know that while your credit score may dip as a result of opening a balance transfer credit card, that alone may not hurt your chances of getting a loan. When making a lending decision, most institutions look at your full credit report, which encompasses much more than just a single score.
You Miss a Payment
As many people may already know, missing or being late on a card payment can result in some of the biggest damage to your credit score. When you transfer your balance to balance transfer cards, two things will likely change – your minimum monthly payments and their due date. Make sure you understand when your new card is due each month, and what your new minimum payments will be after the transfer is completed. You don’t want to be caught off guard, and wind up being unable to pay your bill.
Another good reason to never miss a payment on a balance transfer card, besides the impact to your credit score, is that it might cause you to lose your 0% promotional APR. Many credit card contracts include a clause that stipulates that missing a payment may trigger the termination of this cherished feature.
You Merely Apply for the Card
Even just applying for a balance-transfer credit card can push down your credit score a bit, at least temporarily. First, when you go to apply for a balance transfer credit card, the bank will do a hard check, or “hard pull”, on your credit file to determine your eligibility. This alone will ding your score by a few points, especially if you try to apply for several cards at once. Additionally, once you open a new credit card account, whether it’s a balance transfer card or not, you affect something called your average age of credit. Many popular credit scoring models use the average age of all your credit accounts as one of the metrics that help determine your score. Whenever you open a new account, that average age is depressed somewhat, which negatively impacts your score.
You May Affect Your Credit Utilization
Another key aspect of your FICO score that a balance transfer credit card may affect is what’s known as credit utilization. This term refers to the percentage of your total line of credit that you are currently using; less is considered better. FICO measures credit utilization in two ways – total across all accounts and per card.
To illustrate this, let’s imagine you have two credit cards opened – let’s call them A and B. They each have an outstanding balance of $1,000. Card A has a credit line of $5,000, while Card B has an $8,000 limit. The utilization on Card A works out to 20% ($1,000 / $5,000), while card B has 12.5%. Across all of your accounts, your total utilization is around 15% ($2,000 debt / $13,000 total credit line). All-in-all, these are really low, and thus really positive, utilization ratios.
Now, let’s see what happens if we introduce balance transfer credit card C. You get approved for a $4,000 line of credit and move all of your debt to it. While your other two cards will now have a utilization of 0%, Card C will be using 50% of its available credit ($2,000 / $4,000). For models such as FICO 8, a utilization above 30% is generally considered poor and may decrease your credit score.