Balance Transfers and Credit Scores

Transferring credit card balances to a new card or an existing one can be effective way to manage your credit card debt and minimize interest payment. However, each new credit card application will have a negative effect on your credit score that must also be managed.

Dropping Score

Opening a new credit line for a balance transfer will lower your credit score immediately. The formula used to calculate a credit score considers new lines of credit as an indicator that the person may be taking on more debt, which would increase a lender's risk. New accounts make up about 10 percent of your credit score. When the transfer is made between two existing cards, there is no drop in score because the average age of your accounts decreases.

Short-Term Effect

The drop in your credit score can be temporary if you make your payments on time and don't use all the credit available in the account. Once you demonstrate there is little risk with the additional credit because you make on-time payments, your score will return to its previous level. As long as you continue to make on-time payments, the number of credit accounts you have won't have a large impact on your credit score. Another short-term drop in your credit score comes when the application for a new card is made. Each time you apply for a credit card, the card issuer will look at your credit history. These inquiries will cause a drop in your score of a few points. It is a short-term drop that should only affect your score for a few months.

How It Can Help

While moving debts between cards with balance transfers can help keep your interest rate low, it also could help improve your score in some instances. If you use a new credit card to make your balance transfer, the new account and its credit limit increases your available credit overall. One factor in determining your credit score is debt-to-credit ration or credit utilization ratio, which is the amount of debt you carry relative to your available credit. A low debt-to-limit ratio raises your credit score, and by increasing your available credit with a new credit card account, you will lower your debt-to-credit ratio, assuming your don't increase your debt.

Alternatives to Transferring

While there are benefits to making balance transfers, you will typically pay 3 percent to 4 percent of the balance transferred as a fee to the company. The raises your amount of debt, which can pull your credit score down because your credit utilization ratio increases. However, paying down your debt will accomplish the same thing as increasing your credit limits without adding to your total debt. Also, if you keep your debt low enough to pay it off each month, you would not have to pay any interest.