Do balance transfers hurt your credit score?

Reader Questions are answered twice a week by TPG Senior Points & Miles Contributor Ethan Steinberg.

Before you start opening rewards credit cards it’s very important to understand how the actions you take today will affect your credit score for years to come. The same is true if you’re in debt and working to pay it off. TPG reader Hildy wants to know if she’ll be penalized for using a balance transfer to pay off debt …

I pay my credit card balances in full every month and have not paid a monthly interest charge in many years. But I have taken advantage of 0% transfer offers by paying the transfer fee right away, and then paying a particular amount every month. The amount I pay each month is considerably more than the minimum payment due. So consequently I do have an outstanding balance (at 0% interest) for several months. Does that lower my credit score?

TPG READER HILDY

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While Hildy mentioned that she’s not currently in credit card debt, balance transfers can be a great strategy for paying off debt. Instead of watching your interest charges grow month after month, you can open a card with an introductory 0% APR offer and transfer your balances to that card. Then you can pay it off over the course of 12 to 15 months (depending on the specific offer) without racking up any additional interest.

So, will leveraging a balance transfer hurt your credit score? There are five factors that are used to calculate your credit score: Payment history, amount of debt (utilization ratio), length of credit history, new credit (recent inquiries) and credit mix. Let’s take a look at them one by one to see what impact a balance transfer would have.

Related: The best balance transfer credit cards

Payment history is by far the most important factor in your credit score, and in the way Hildy described, a balance transfer would have no effect. Since Hildy is making more than the minimum payment on her card each month her payment history would stay strong, even though she’s not paying off her entire balance at the end of the month.

Utilization ratio is a bit trickier. This refers to the total amount of debt you owe versus the total credit limits you have from various banks and issuers. Opening a new card for the purpose of a balance transfer would increase the total amount of credit Hildy had, so that should help her utilization ratio go down. The only problem is that having a high ratio on a single card after the balance transfer might be problematic, but overall I wouldn’t expect a significant impact to her credit score in this category.

Whether length of credit history will matter depends on the rest of her credit history. If she has dozens of cards that have been open for many years each, opening one new card won’t really register. If, on the other hand, she has a short credit history and only a couple of cards, opening a new one could cause her average age of accounts to plummet, adversely affecting her score.

Any time you apply for a new credit card you can expect a roughly 5-point hit to your credit score from the new inquiry, so Hildy should be prepared for that if she’s opening a new card for balance transfers. Last but not least is credit mix, a category that’s unlikely to change much if she opens a new card.

Related: 6 things to do to improve your credit score

Bottom line

As long as Hildy keeps making at least the minimum payment each month, she won’t be penalized for using balance transfers to pay off a large balance. Over time her utilization ratio will drop as she pays down the balance, and as long as she doesn’t open too many new accounts in a short window, this sounds like a solid strategy.

Thanks for the question, Hildy, and if you’re a TPG reader who’d like us to answer a question of your own, tweet us @thepointsguy, message us on Facebook or email us at info@thepointsguy.com.

Featured photo by Isabelle Raphael/The Points Guy.