Does a balance transfer affect your credit score?

Applying for another credit card to help pay off existing credit or store card debt might sound counterintuitive, but it works and is worthwhile despite how it may affect your credit score initially. 

What is a credit score?

When you apply for a loan or some other form of credit, the three credit agencies, Experian, Equifax and TransUnion, generate a credit report. This includes a credit score, which reflects how reliable potential lenders consider you to be. Your score can move up or down based on your interactions with most forms of credit. However, student loan debt doesn’t affect it. 

Here’s how each assesses your scores:

What is a balance transfer card? 

Getting a balance transfer credit card is a popular way to help clear the debt you’ve amassed on other credit or store cards. This option allows you to move almost all your debt to a card with no interest for a set period. 

Ideally, the 0% term should be long enough to repay the transferred balance, leaving you debt-free. Even better, once that happens, lenders reviewing your credit report can see that you successfully managed your debt. This makes obtaining other types of credit, like a mortgage, at attractive rates easier. 

Why you should shop around for a balance transfer credit card? 

There are balance transfer cards with 0% interest deals lasting from six to 20 months. Finding the best ones involves shopping around because, with a little effort, you may find one that allows you to clear your debt before the high interest rate kicks in. 

Ensure you note the balance transfer fee. This is typically between 3% and 5% of the amount moved to a new provider’s card. You may be able to transfer up to 93% of your overall credit card debt. The need to cover the balance transfer fee and transactions not yet processed explains this shortfall. 

Does a balance transfer affect your credit score? 

Any company that lends money is taking on an element of risk. They don’t know you and can only rely on your track record of dealing with debt. For this reason, they run a credit check on you, which allows them to see your credit history, including payment defaults and credit applications.

Applying for credit indicates that you have less disposable income than you need and are reliant on some form of credit. Lenders take this as a sign that you struggle to manage your money, and the credit score reflects their conclusions. 

How to reduce the impact of a balance transfer 

Credit checks typically affect your credit score, but they’re unavoidable if you want a balance transfer card. Fortunately, there are some steps you can take to limit the impact on your credit score: 

Don’t apply for numerous balance transfer cards

Applying for several balance transfer credit cards all at once smacks of desperation and could lead lenders to conclude you're not great at managing your money. 

Don’t ditch all your old credit cards

Jettisoning all your cards suggests you’re concerned about giving in to the temptation to spend more than you should. 

Clear your credit card balance

The whole point of having a balance transfer credit card is to get out of debt and rebuild your finances. Use the interest-free period to repay what you owe before the 0% term ends. 

Read more: What happens to your credit card after a balance transfer?

Can a balance transfer improve your credit score?

In the long run, having a balance transfer card, when used correctly, should improve your credit score. It does this in two ways: 

• Moving all your credit card debts to a single balance transfer card makes it easier to stay on top of your finances. Committing to a monthly repayment schedule to clear what you owe before the 0% deal term ends should help your credit score. Use a credit card repayment calculator to help you work out how much you need to repay. 

• Repaying a credit card debt takes time and money. However, once you see it through, you should have more money as you don’t have repayments to make and can start saving for your future, avoiding the likelihood of your dropping into the red again. 

Should you transfer your balance? 

Transferring credit card debt from cards charging high levels of interest to one with an interest-free period makes a lot of sense. Moving debts to a single card makes managing repayments easier, while the 0% interest period should help you clear your debt quicker and improve your credit score. 

Of course, you must be sure you can repay your balance in full before the 0% period expires and the interest rate rockets. Don’t forget to factor in the balance transfer fee when figuring out what you ck

Read more: Pros and cons of a balance transfer

How balance transfer card spending could harm your credit score 

Some balance transfer cards feature extra benefits and rewards, such as cashback or shopping discounts. These sound great, but remember that the main reasons to get a balance transfer card are to clear your debt and improve your credit score. Spending on the new card won’t help you achieve either. 

On this point, remember that new purchases aren’t usually included in the 0% deal and attract interest at a much higher APR – 34.9%, for example. This rate may kick in when you first spend on the card or make purchases after a short 0% period of perhaps three months. 

How can you find out your credit score? 

You can find your credit score by getting your free statutory credit report from the three credit agencies – Experian, Equifax and TransUnion. Note that the agencies also offer more detailed reports. These cost around £15 a month after a free 30-day trial period. Select the statutory report to avoid any charge.

Read more…

• Compare balance transfer credit cards

• Common balance transfer mistakes – and how to avoid them

• Pros and cons of balance transfer cards