If you transfer your balance, will it affect your credit score? Yes, it can. When credit was flowing freely a few years ago, money savvy consumers often transferred balances from one account to another every few months.
It seemed to be a smart practice as almost all banks were offering 0% APR rates for the first 6-12 months if you would apply for their credit card.
If you did this in the past it would work well for a while. Eventually you would be declined for a new 0% rate and a new credit card. This could happen even if you had a perfect payment record.
Debt to Income Ratio
The problem was the debt to income ratio, which is a cornerstone of all lending decisions. When you transferred $5000 in debt from a credit account with a $10,000 spending limit you probably didn’t cancel the first card.
Opening a second account with a spending limit of $10000 and transferring that $5000 balance was a smart financial decision.
However, each time you transferred to a newly opened account you were creating more open credit line that could potentially be used or misused. At some point, a lender would decline your latest application and the reason given would be “too much open credit available”.
Avoid Common Pitfalls
Even in a tight credit market as the one we have today, the ratio of debt to income is an even bigger factor for lending banks. Any financial move that significantly changes your debt to income ratio can be viewed as increased risk by lenders.
When transferring your balance to a new account, try to keep the ratio of debt to credit line the same or slightly lower. In most cases, you will not want to cancel the old credit card as that will remove the credit available to you.
At the same time, avoid asking for a higher spending limit on a new card when you plan to transfer a balance. If you have a credit card with a spending limit of $10,000 and debt of $5000, you are using 50% of the money available to you.
Opening a second account with a $10,000 limit allows you transfer a high APR balance to a 0% rate. It reduces your credit ratio to 25%. In other words, you now have $20,000 in spending limits to use and only $5000 in debt.
Lenders today look at unused spending limit as a risk factor. If you transfer a balance twice the lenders may look at the increased spending limits as money you could potentially use.
If they feel using all of that credit would lead to an inability to pay your bills, they will reduce your spending limits or perhaps cancel a credit card.
How to Avoid Problems During The Transfer
Do not close the old credit account after the transfer is completed. You may not plan to use that higher interest rate account in the future but unless the new account carries a higher spending limit, keep the first account open for now.
Do not transfer your balance every time the 0% interest rate expires. Instead, try to pay down your debt quickly during the period of 0% APR.
If you still have debt remaining on the account, pay it for a few months before making application for a new 0% APR credit card.
If you transfer your balance try to do so in a way that does not radically change the ratio of debt to spending limit. If anything, the new account should result in a decrease of debt percentage when the totally spending limit is considered.
It may be tempting to transfer balances frequently as a way to avoid paying interest rates on credit cards.
However, frequent transfers are often viewed by credit rating bureaus as an indicator of risk so plan carefully when you transfer credit card balances.