Credit Card Balance Transfers: Will My Credit Score Tank?
By Marianna Guzic on The Capital
If you are one of the roughly 50% of Americans who are burdened by credit card debt, you dream of waking up one day and all that debt magically disappearing. I hate to bring the bad news to you, but that’s not how it happens.
Instead, you’ll continue paying minimum payments only for the credit card company to come back at you with interest that was more than what you just paid.
You’ve probably heard people saying that you can transfer your credit card balance to a new card that has a 0% interest period. You’re super stoked about it, but what will that do to your credit score? It is worth the savings to transfer?
What is a balance transfer?
A balance transfer is exactly what it sounds like. It’s like a gift credit card companies are willing to give in hopes of you acquiring more debt and giving them more money. But in all seriousness, it’s transferring your high interest credit card debt to a low or zero interest card. There are credit card companies that allow you to transfer your existing debt balance to their cards upon the opening of a new account. If that’s not generous, I don’t know what is.
What are the benefits?
Before deciding to do a balance transfer, it’s important to do research on different credit cards and what special offers are available. Many have a grace period in which there is a 0% interest for 12, 18, or even 24 months. This allows you to save on interest you would otherwise be accruing and paying on the existing card.
Let’s say your debt is equal to $3,000. With a current APR of 17%, which is the average as of January 2020, total interest for the year would be $510. Unfortunately, the calculation is not that simple. The way credit card interest works is called periodic interest, where the 17% is divided by the periods to which interest is applied.
To simplify, if interest is applied to the unpaid balance monthly, 1.42% (17% / 12 = 1.42%) of interest is added every month to the unpaid balance. Complicated, hu?
So you probably won’t end up paying $510 in interest if you continually pay monthly an amount that is larger than the interest charged. Super confusing, I know.
Want to save yourself the headache? Don’t accumulate credit card debt and you won’t have to worry about it. Problem solved.
In all seriousness, if there is no grace period or the new interest percentage isn’t lower than your current one, it’s honestly not worth doing a balance transfer.
What to look out for
One thing to keep in mind when opening a credit card is the balance transfer fee. Most credit cards have one which is usually 3–5% of the transfer amount. Typically this isn’t the make-or-break it part of the decision. Just a heads up so you’re not surprised why your debt balance increased.
If we’re to look at the example above, on $3,000 of debt you’d pay $90-$150 on the transfer fee.
Also, something to remember, the credit limit given to you on your new card may not be enough to cover your total balance you wish to transfer. This can cause potential issues and you’d have to decide what to do from there. Transfer what you can and pay the rest on the existing card or try to open another card in hopes you get a better credit limit on that one. The second option isn’t very wise because as you’ll learn later, every inquiry made on your credit report for each card opened lowers your credit score.
Consequences
Besides the fact that you’ll most likely get hit with a fee, let’s look at the potential hits to your credit score. This IS why you’re reading this post anyway, right?
The moment a lender makes an inquiry on your credit account it is added to your credit report. This only makes up 10% of your FICO score so it’s not bound to decrease it by much if any.
What can have an effect on your score is the impact on the length of credit history and the amounts owed?
Opening a new card changes the length of your credit history. What the scoring models look at is the date each account was opened to determine the length and also the average age. The more you open new credit accounts, the lower your average credit age is and this isn’t necessarily a good thing. Even though this only accounts for roughly 15% of your score, it’s one factor that can drop your score slightly.
The impact to your account utilization is an important factor as it accounts for 30% of your FICO score. This is how high your balance owed is compared to the total credit limit. Transferring balances to a new card result in the number of accounts with balances to decrease which will help your credit score.
Conclusion
In conclusion, it’s never for certain what your credit score will look like after doing a balance transfer. If you look at it from one side, it’s a fantastic idea. You’ll potentially eliminate the interest you were to pay on that amount saving you hundreds of dollars. Also, your account utilization drops increasing your credit score.
On the other side, there are factors that can drop your score by a few points. You’ll get hit with a transfer fee, but don’t let that be what scares you away from doing this. You could still save money, just do the math beforehand.
A more serious problem to look out for is concerning the future. Just because you were given a grace period of 0% interest, don’t let that stop you from making payments just because you won’t be charged interest.
First of all, there will most likely be a late fee charge — depending on the card. Second of all, before you know it, that period will be over and anything you didn’t pay will be charged with interest once again. And you’re back in the same wheel you started in.
It’s VERY IMPORTANT, and I stress VERY, to stop using your old credit card to make any new purchases. That defeats the whole purpose of all this. This pertains to your new card as well. Don’t rack up more debt just because you’re not paying interest on it. That’s NOT the whole point of this.
Make smart choices and think through all your credit card options if this is the route you wish to take. If you still have any questions, contact a financial counselor for advice and a personalized look at your situation.
Marianna Guzic is a copywriter specializing in finance and accounting topics. If you are ready to transform your leads and be seen as a trusted expert in your field, you can e-mail her at marianna.guzic@gmail.com. Also visit her website: mariannaguzic.squarespace.com to learn more and view other portfolio writings.
