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A balance transfer does not directly impact your credit score, but it can indirectly have a positive or negative effect depending on the actions you take afterward.
A balance transfer is when you transfer an outstanding balance from one account to another, such as from one credit card to a different card with a lower interest rate. While this doesn’t directly impact your credit score, it can indirectly affect it, depending on the actions you take after the transfer.
However, you should be aware that there are potential drawbacks to debt transfers. These include lower credit utilization, hard credit inquiries, missed payments and the potential of entering a debt cycle. Balance transfers can be a useful tool in helping to achieve debt-reduction goals, so it’s important to learn as much as possible about how they work.
Considering a balance transfer? Here are a few things to consider first.
What is a credit card balance transfer?
In essence, a credit card balance transfer is a way of moving debt around. A balance transfer can be a great way to manage existing debt. If you transfer your balance to a new credit card that features an interest-free introductory period, you could give yourself a window of time to pay off your debt without incurring additional interest. AARP advises looking for interest-free periods of 12 months or more.
What is a balance transfer fee?
A balance transfer fee is a cost the lender charges for you to move a debt over from another institution.
This amount varies by lender, and many even waive balance transfer fees for an introductory period (typically 60 days) after opening an account. For example, Bank of America balance transfer credit cards charge 3 percent of your transferred balance with a $10 minimum.
How do balance transfers work?
Balance transfers work by allowing cardholders to “pay off” the balance on a card with a high interest rate using a card with an interest rate that’s lower, even if only temporarily.
Many banks offer balance transfer credit cards specifically for people who are looking to take advantage of introductory zero-interest offers. While you still technically owe the debt you transferred, a balance transfer allows you to pay the debt off gradually with no added interest for a period of time.
Be aware, however, that you are still required to make on-time payments. And once the introductory period is over, your interest rate will go up significantly and will be applied to an unpaid balance going forward.
How long does a balance transfer take?
This period can vary from a few days to a few weeks. Chase balance transfers, for example, can take less than a week or up to three weeks. Wells Fargo balance transfers, on the other hand, post to users’ accounts within 14 days of approval.
Can you pay a credit card with another credit card?
When you perform a balance transfer, you are essentially paying off one credit card with another. However, there may be some limitations on which banks you can transfer funds between, and you typically cannot transfer a balance between cards from the same bank.
Benefits of using a balance transfer to pay off debt
There are several potential advantages to using balance transfers to pay off credit card debt. When done effectively, they can help you by:
- Granting you a short-term interest-free window: Cards with attractive introductory offers could give you a year or more to pay off your debt interest-free.
- Lowering your interest rate: By transferring your balance to a card with a lower interest rate, you can potentially lower your monthly payments and total debt.
- Improving credit utilization: Having multiple credit cards open increases your available credit while leaving your usage the same, which improves your overall utilization. This may increase your credit score.
- Improving your payment history: If you make payments on your new card on time and in full, you’ll build up a positive payment history, which is likely to improve your credit score over time.
Potential balance transfer drawbacks
Though there are clear benefits to balance transfers, you should be aware that there are some potential drawbacks as well. Should you choose to transfer a credit card balance, you may encounter these pitfalls:
- Lowering credit utilization: If you elect to close your old credit card and it has a higher credit limit than your new one, you will lower your available credit while keeping your usage the same. This could hurt your credit score.
- Hard inquiries: Hard inquiries are required for any credit card application and result in a slight drop in your credit score. Though multiple applications of the same type in a short period may only count as one inquiry, you can try to limit your credit card applications. Consolidated Credit advises spacing out applications by at least six months.
- Missed payments: If you miss a payment on your new card, you could end up damaging your credit score.
- Debt cycle: If you aren’t able to pay off your debt during a zero-interest period, you could fall into a balance transfer debt cycle of opening new credit cards, requiring more inquiries and transfer fees.
How to transfer a credit card balance
Have you carefully considered the benefits, drawbacks and implications of a balance transfer and think you’re ready to take the next step? Here’s how to do a balance transfer in five steps.
Step 1: Comparison shop
First, you’ll want to compare details such as the balance transfer fee, interest rate, length of the promotional period, annual fee, credit limit and basic requirements to qualify. Ideally, you want to find a 0-percent interest rate period. This type of promotion will allow you to put all the money you save in interest back into paying off your debt.
If you already have multiple credit cards, you may be able to transfer your balance to one of them. This option can save you from a hard inquiry.
Step 2: Decide how much money to transfer
Most people assume they’ll transfer their entire balance to the new card. However, this might not always be an option due to your new credit limit. It also might not be the best option if you’re going to pay a fee based on the transfer total. Determine what amount is best based on your credit utilization ratio, balance transfer fees and card transfer limits.
Step 3: Apply for a new card (if not transferring to an existing card)
You can apply for most balance transfer credit cards online in just a few minutes. You’ll need basic personal information like your address, Social Security number and annual income. Remember that this will result in a hard inquiry, which will likely cause a temporary dip in your credit score.
Step 4: Review the terms and conditions
Whether you’re transferring to a card you already hold or to a new one, the fine print on a balance transfer can be lengthy, and you should review it all. You’ll want to understand all the potential fees, terms and official agreements of the transfer.
Step 5: Follow through with your debt payoff plan
This is especially important if you have a temporary low- or a zero-interest period, because you want to avoid paying more money in interest. Try to avoid making new purchases on the balance transfer card. Your priority is to get your debt under control. Consider using autopay to help you make payments on time and in full.
Balance transfer credit considerations
It’s good to check your credit reports and credit scores regularly, and this is especially true when you change something about your finances, like when you complete a balance transfer. If your balance transfer lowers your credit score, there are other steps you can take to work on getting your score back up.
If you find yourself struggling to understand your credit score—or how to repair it—consider professional help. The credit repair consultants at Lexington Law Firm can help you review your credit report to make sure it’s a fair, accurate and substantiated representation of your credit profile.
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