The credit card maneuver known as a balance transfer is a great way to knock down debt. And it will boost your credit score too, if you do it right.
There’s just one catch.
Balance transfer deals are pretty hard to find these days.
With 2020’s high unemployment numbers and economic uncertainty, banks are worried about customers defaulting on their loans, so they’re tightening their lending standards.
That includes balance transfer credit cards, says Ben Dobler, CFP EA, financial coach, and founder of Stewardship Financial Counsel, a virtual financial coaching agency. “In a recession, banks crack down on balance transfers because they carry increased risk for lenders,” Dolber says. Therefore, many card issuers like American Express and Chase have removed balance transfer cards from the marketplace.
Opportunities for balance transfers are still available, though. Before you go looking for one, consider how to do it in a way that helps—not hurts—your credit score.
What Is a Balance Transfer?
Balance transfers are kind of like an interest-free loan. You take the balance owed from a credit card that charges interest and transfer it to another card account with lower or zero interest.
The goal of a balance transfer is to save money by temporarily pausing interest and focusing on paying your principal balance down.
Banks typically offer special balance transfer cards that come with an introductory period with little or no interest. These introductory periods can last anywhere from 12 to 20 months, depending on the card issuer and available offer.
Your goal should be to wipe out your balance by the end of the introductory period. Otherwise, a new high interest rate may kick in. Credit cards, in general, carry high rates. According to the Federal Reserve’s most recent report, the average credit card APR (annual percentage rate) is 15.78%.
You may also be responsible for a one-time balance transfer fee when you transfer your debt over to your new card. But if you have a smart payoff plan in place, that fee can be worth the cost in order to get the low- or zero-interest introductory period.
How a Balance Transfer Can Affect Credit Score
As with any financial move, it’s important to consider both the risks and rewards so you can make an informed decision.
To get the most out of your balance transfer card, strive to pay down your balance before the promotional period ends.
Positive Effects on Credit
Credit utilization ratio. Your credit utilization makes up 30% of your credit score. Credit utilization ratio is expressed as a percentage and calculated by how much you owe divided by your total credit available. The lower the number, the better. When you add a new balance transfer card to your existing accounts, that credit limit is added to your total credit available. Having more credit available to you lowers your credit utilization and also increases your credit score.
Money saver. High-interest credit cards can make paying off debt much more difficult. Using the zero-interest introductory period to pay down the principal will save you the money you would have spent on interest. “Taking advantage of balance transfer cards can improve your credit score if the transfer leads to a reduced interest or 0% interest rate, enabling you to reduce the overall debt faster,” says Dr. Bob Castaneda, program director for Walden University’s MS in finance program.
As debt lowers, so will your credit utilization ratio, increasing your credit score.
Improve payment history. If you transfer multiple accounts to a balance transfer card, this will make budgeting easier since single monthly payments are easier to manage over juggling multiple payments from multiple accounts. On-time payment history accounts for 35% of your credit score, and the simplicity of single payments can help focus on making payments on-time.
Credit age. The age of credit accounts makes up 15% of your total credit score. If you make a balance transfer, keep the account open you transferred from. Keeping older accounts open maintains your credit age history and has a positive impact on your overall score in the long run. Be sure to stop spending on the card you transferred a balance from.
Negative Effect on Credit
Fees add up. Most balance transfer cards come with fees, usually between 2% to 5% of the balance transferred, per transfer. That means, if you’re transferring $5,000, your balance transfer fee would be between $100 and $250. These fees are added to your balance and can add up with multiple transfers. The increased debt can also increase your credit utilization ratio. As we learned earlier, this increase can lower your credit score.
New Credit. Each time you apply for a credit card, you go through a hard credit inquiry. Many requests over a short period of time will result in a drop in your credit score. To minimize the impact, choose a balance transfer card and apply to one. Your score will lower a few points for the one inquiry and will stay on your credit report for two years.
Even though new credit activity accounts for 10% of your credit score, the higher weight granted to paying off debt and making on-time payments outweighs the temporary hit you will take on your score with one credit check. If you don’t use the balance transfer card to pay down debt and miss timely payments, you will hurt your credit score long-term since the benefits won’t counter the negative effect of the credit check.
Misuse. Adding another credit card to your credit report has its benefits if used wisely. Misusing the new card for spending other than paying down debt will only make matters worse. If you treat the balance transfer card as a debt management tool to consolidate other high-interest debt, you will see results. Using a new balance transfer card on additional spending creates more debt. This will only increase your utilization ratio, negatively lowering your credit score.
How to Apply for a Balance Transfer Card
When shopping for balance transfer cards, look at the card’s APR after the zero-interest promotional period ends, how long the promotional APR lasts, and any fees you may be charged when doing a balance transfer.
Visit, call, or search online with your bank or credit union. You can also check out NextAdvisor’s round-up of available balance transfer offers. You’re often able to qualify within minutes. Once you have your card, you can begin making transfers to the card account. Balance transfers can take time – often up to three weeks. You typically can’t transfer a balance from one card to another within the same banking group.
The types of debt you can transfer vary from one lender to the next. Depending on the card, you may transfer balances from personal loans, credit cards, student loans, auto loans, and home equity loans up to your available credit limit. Your credit limit is the amount you can spend based on your credit application and history.
The Bottom Line
If used wisely, balance transfers can be a practical money-saving way to manage debt. “They can grant you a temporary reprieve from interest to work on paying down your debt, which also boosts your credit score,” says Dobler. “In the long run, balance transfers can surprisingly boost your credit score by lowering your overall credit utilization, which is how credit reporting agencies measure how much of your available credit you’re using at a given time,” he continues.
Watch out for the pitfalls, though. Be cautious with how many cards you apply for at once. Be careful not to overspend and add more debt to your new card. Strive toward paying off your balance before the 0% interest rate promotion ends.