However, there’s another implication you must consider if you’re considering using balance transfers to merge outstanding credit card balances–you should consider how a balance transfer will impact your credit score. As with many questions about credit scores, the impact of balance transfer on your credit will vary. Most times, a balance transfer can boost your credit score, but a bungled balance transfer process can hurt your score. Experts on credit repair in Houston, Texas, like those at The Phenix Group, can help you better understand this process.
When a Balance Transfer Can Improve Your Credit
Balance transfers on their own won’t boost your credit score, but they could cause some changes to the overall makeup of your credit report that might benefit you. Here’s an example of how balance transfers may improve credit scores:
Lower Credit Utilization Ratio
The utilization ratio is the relationship between your credit card balances and limits–it’s a crucial factor in credit scores. If, for instance, you open a new account and move balances from your other credit card accounts, the balance transfer may lower your credit utilization ratio.
Suppose you have two credit card accounts with the following limits and balances:
Account Credit Card Limit Credit Card Balance Credit Card A $10,000 $5,000 Credit Card B $10,000 $5,000
In the example above, your aggregate credit utilization ratio is 50%. This is the percentage of the available card limits you’re using. Here’s how to calculate your credit utilization ratio:
- $10,000 (Total credit card balance) ÷ $20,000 (Total card limit) = 0.5 x 100% = 50% credit card utilization ratio
Suppose you apply for another credit card with a 0% balance transfer offer. You’re eligible for a credit card with a $20,000 credit card limit and a balance transfer of $10,000 worth of existing debt to the new credit card account.
Account Credit Card Limits Balances Credit Card A $10,000 $0 Credit Card B $10,000 $0 Credit Card C $20,000 $10,000
Thanks to your new account and balance transfer, your aggregate credit utilization ratio will drop to 25%.
- $10,000 (Total balance) ÷ $40,000 (Total card limits) = 0.25 x 100% = 25%
A 25% utilization ratio is often better for your score than 50%. Also, your utilization ratio will drop even further as you pay your balance, as long as you don’t create new debt. In this example, you have an excellent chance of improving your credit score, thanks to bank transfers.
When Balance Transfers Can Lower Your Credit Score
If you manage balance transfers wisely, they can be beneficial to your credit score. Sometimes, balance transfers may lower your credit score, instead of raising it. Here’s an example:
Hard Inquiries
An application for a new card with a balance transfer offer may negatively affect your credit score. When creditors check your credit file, they perform a hard credit inquiry, which can hurt your credit. However, credit inquiries are less significant than other credit files’ information. Therefore, if you are considering applying for a balance transfer, bear in mind that:
- Credit inquiries affect only 10% of a credit score
- Not every hard credit inquiry lowers a credit score
- After a year, hard credit inquiries no longer affect your score
You should be selective when applying for new credit, and if you don’t overdo it, you have nothing to worry about when applying for financing, such as balance transfers, because the benefits are greater.
Wondering if credit repair shows up on a credit report or if switching banks can hurt your credit? Take a look at our recent articles.
Final Thoughts
Balance transfers can help you save money; however, opening new credit cards to transfer balances can have either a positive or negative impact on your credit score. Because of this, it’s important to ensure you understand the pros and cons of balance transfers before you apply for one. Determine your current credit score to create a baseline, and be mindful when applying for a new credit card account in order to keep a positive score. Professional credit repair experts at The Phenix Group, right here in Houston, can help you understand all aspects of balance transfers and how they may affect your overall credit.