If you’re thinking of transferring the balance of one credit card to another, take some time to think through the pros and cons. On the one hand, a balance transfer can be an effective way to pay off your debt. On the other, you could end up paying a heap of transfer fees or taking on more debt. Then there’s your credit score. Yes, that’s right. A balance transfer could impact your score in a few different ways. Below are the two you should pay attention to the most.
Credit Use Ratio
As USA Today reports, your credit utilization — often referred to as your debt-to-credit ratio — is a huge factor when it comes to your credit score. If this number is too high, it will negatively impact your score. For example, if you owe $1,000 on a card with a $2,000 credit limit, your ratio is a whopping 50 percent. That’s bad. However, if you open a new card to transfer your balance, your debt-to-credit ratio will increase, and that’s good. Let’s say you open another card with a $1,000 limit. If you don’t take on any more debt, your ratio has now dropped from 50 percent to 33 percent. That’s good for your score! If, like we said, you don’t take on more debt. The issue here is that suddenly you have more credit available, and thus might be tempted to use it. Have a plan in mind before opening that card to avoid this pitfall.
Transferring your balance usually means opening a new card, and that means the card issuer will pull your score. That inquiry will put a temporary dent in your credit score. You should be fine over the long-term. Just don’t open several cards at once in one big balance transfer frenzy. That will lead to many inquiries, which will hurt your score in a big way.