If you’re struggling with debt and high interest rates keep eating up most of your monthly payments, a balance transfer card may be just what the doctor ordered. A balance transfer credit card will offer 0% interest for 6-21 months.
But there are lots of things to consider before applying for a balance transfer card. While some balance transfer cards charge a 3-5% upfront fee to transfer a balance, some cards don’t charge any fees. Either way, scoring 0% APR for a year or longer can help you along in your climb out of debt. Without interest to pay, your entire monthly payment will go directly to the principal of your balance and hack away at your debt that much faster. (See also: Step by Step Guide to Doing a Balance Transfer)
What do balance transfers do to your credit?
While the scenario above might sound ideal, it’s important to understand what happens to your credit, if anything, when you apply for a balance transfer card and actually transfer a balance.
While opening a new credit card will ding your credit, fortunately, the news isn’t all bad.
Here are some of the “mixed bag” consequences you might see after you sign up for a balance transfer card and transfer a balance.
You’ll get a hard inquiry on your credit report
First things first. When you sign up for a new credit card, you will get a hard inquiry on your credit report. A hard inquiry is a notation on your report that says you applied for a new line of credit. While a hard inquiry doesn’t spell doom for your credit, it’s fairly common for your score to dip a few points with each hard inquiry.
Fortunately, any impact you see will likely last only a few months, as “new credit” only makes up 10% of your FICO score. (See also: 5 Factors That Make Up Your FICO Score)
Your average credit history will go down, potentially dinging your score
According to myFICO, the average length of your credit history makes up 15% of your FICO score. With that in mind, it shouldn’t surprise you that opening a new credit card will reduce the average length of your credit history and potentially lower your score. Since this factor only plays a small role in your FICO score, however, any change in your score should be short-lived.
Adding a new credit card increases your available credit limits, perhaps lowering your utilization in the process
Your credit utilization makes up 30% of your FICO score, and is determined by comparing the amounts you owe to how much available credit you have. If you have a $10,000 credit limit on one credit card and you carry a $5,000 balance, your utilization is at 50%. If you open a new credit card and add $10,000 more available credit, your utilization would go down to 25% ($5,000 balance on $20,000 in available credit).
Because the credit reporting agencies see lower utilization as a good thing, this is one area where signing up for a balance transfer card could actually boost your credit score. The rule of thumb is to keep your utilization ratio at 30% or less. Around 10% is ideal.
Paying off debt will ultimately improve your credit score
If you transfer your balance and immediately start paying down debt, you could also make a positive impact to your credit score. Not only will your utilization continue going down, but you’ll get even more good marks for making monthly payments on time. Payment history makes up 35% of your FICO score, the largest component of your score — so this is a really important factor.
What to watch out for with a balance transfer
While opening a balance transfer card can impact your credit score in both positive and negative ways, you’ll want to make sure to avoid certain pitfalls as you move through the process. Ideally, you’ll transfer a balance and pay off all your debt for good, but we all know that life often gets in the way. (See also: Your Comprehensive Checklist for a Successful Balance Transfer)
Before you open a new balance transfer card, here are some moves you should try to avoid.
Don’t max out your old card again
Transferring old debts to a new balance transfer card may feel like a huge relief. Not only are you getting 0% APR on your balance as you pay it down, but you freed up open credit on your old credit cards in the process.
It might be tempting to use your old credit card again, but you should avoid using credit altogether. Old habits die hard, and that’s especially true if you have a penchant for overspending or using credit as a crutch.
If you start using your old credit card for purchases and fail to pay off your balance each month, you could easily rack up even more debt that will accrue interest and make your debt payoff journey that much harder.
Once you transfer credit card or loan balances to a balance transfer card with the goal of paying off debt, you’ll be better off if you put your cards away and stick with cash or debit for a while instead.
Avoid the “balance transfer game”
Far too many people transfer a balance but never build up the discipline to pay down their debt. Then, when their 0% APR introductory offer is over, they’re still left with a sizable balance they failed to pay off.
Many times, the easiest answer is to just transfer the balance to new and different 0% APR cards over and over. The downside with this option is that you may never pay down debt with this strategy. Even worse, you’ll likely be paying a balance transfer fee of 3-5% of your balance each time you transfer. While those fees might seem worth it, they will add up over time.
Keep your old account open — even if you’re not using it
While you might feel inclined to cancel your old credit cards once you transfer balances to a new 0% APR card, your credit score will thank you if you keep old cards open. Remember that the average length of your credit history makes up 15% of your FICO score. By keeping old cards open, you’re effectively improving your credit score without any added work.
Take your debt payoff goals seriously
Last but not least, make sure you’re treating debt payoff as a priority, and it will become one. While it’s easy to transfer a balance and make only the minimum payment toward your debts, it will take you longer to reach your goals if you’re not proactive.
The best balance transfer strategy is one where you take your debts seriously. Scoring 0% APR for any length of time will help you pay down your balance faster, but only if you attack your debt with fervor.
Don’t be complacent; instead, use your balance transfer offer to attack your debts with all you have. With some hard work, patience, and dedication, you could put all your debts in the rearview mirror, once and for all.