Credit card companies tend to offer up lucrative perks to attract new cardholders, including 0% introductory annual percentage rate (APR) offers that put a temporary halt to interest charges for anywhere from 12 to 21 months. Better known as balance-transfer credit cards, these cards can be powerful tools to pay off credit card debt faster. (The Motley Fool compiled their picks of the best balance-transfer credit cards.)
But what credit score implications do cardholders need to consider, both when applying for, and after transferring balances to, a new card? The Motley Fool analysts Nathan Hamilton and Michael Douglass answer a user-submitted question in the video below about how balance transfers and paying off debt impacts your credit score.
Michael Douglass: Max writes in, "Does balance transfer hurt your credit score besides the hard inquiry?"
Nathan Hamilton: There are a lot of moving parts to that, and we'll try and tackle it the best way possible.
Douglass: Yeah, as well as we can. Your credit score has ...
Hamilton: Five factors, depending on the credit scoring agency.
Douglass: Yeah, so, it's a more complex question than I think many people realize.
Hamilton: But I think we'll be able to give him an answer where he can walk away and say, "OK, that's actionable." Specifically, when you're looking at balance transfer credit cards, opening a card, you're going to have a hard inquiry. So yes, 5-10 point drop in your credit score in the near term. But if you pay that card on time, if you bring your credit utilization ratio down, those two factors alone account for 65% of your credit score, and that has a far greater impact on your credit score than a new hard inquiry does in the near term. So, in those instances, yes, it can favorably influence your score over longer periods. One thing you have to look at is, when you are transferring balances, if you transfer a balance from one card, from the old card to the new card, and close down the old one, and the credit limits are different, your credit utilization ratio is debt divided by total available credit, and if your total available credit number moves and your debt doesn't change too much, there could be some small impacts to your credit score, potentially positively, potentially negatively. But, I don't imagine there are going to be any huge swings.
Douglass: Yeah. Generally speaking, it's not going to be a big hit to your credit score, and will generally be very preferable to having to carry a balance and then pay a lot of money on that. Again, we can't speak to your personal circumstances.