What Happens to Your Credit Score When You Transfer a Balance?

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If you want to
pay off your credit card debt faster
, you might transfer your balance to a low-interest (or better yet, zero-interest) credit card. It’s not a move you want to make lightly, but it can be a useful hack. And surprisingly, it might actually boost your credit score.

How a Balance Transfer Works

With a balance transfer, you take the balance you carry on a high-interest credit card and move it to a card with a lower interest rate. Some cards even offer 0% introductory interest for balance transfers. This way, you can save money on interest and pay off your principal amount faster.

You have to
be super careful with this
hack, though. It should go without saying, really, but make sure you read the fine print: many cards will charge you a balance transfer fee. Others come with a 0% interest promotional period for six months or so, then charge you sky-high interest (like, 30%) after that period. So if you don’t pay off your balance in full at that time, you could pay even more interest than you would have in the first place.

How a Balance Transfer Affects Your Credit

Surprisingly, though, a balance transfer can actually improve your credit score. As Credit.com’s
Abby Hayes points out
, this is thanks to something called a
credit utilization ratio
.

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Your credit utilization ratio is the amount of credit you have available to you versus the amount you actually use. So if you have one credit card with a $10,000 limit, and your balance is $1,000, that means your credit utilization is about 10%. That’s not bad-most experts recommend
keeping your total credit utilization under 30%
to keep your credit score intact.

Basically, though, the more available, unused credit you have, the better. Assuming you keep your old card open (and don’t rack up more debt), if you open another card to transfer your balance,
this could be a good thing
because it means more available credit.

Hayes explains:

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If you’re approved for a new credit card with a balance transfer offer, you’ll wind up with a higher overall credit limit. This could be a good thing, since it will push your debt-to-credit ratio lower.

In the above example, if you’re approved for a new card with a $1,000 limit, your total credit limit will be $3,000. As long as you don’t accrue more debt, your total debt-to-credit ratio will be about 33%. Since that’s better than 50%, your credit score should be fine. Plus, with a lower interest rate, you can presumably pay off the debt quicker.

Even better, when you pay off your debt, your score will improve even more because you’re using even less available credit.

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If you’re thinking about a balance transfer, you can research card terms on sites like
Credit.com
,
NerdWallet
or
Bankrate
. They can be totally worth it, just make sure you
follow the rules
and transfer responsibly.



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