Balance Transfers Can Boost Your Credit Score

While a balance transfer request may come with a temporary credit score ding (does a balance transfer hurt your credit score?), it could actually improve your credit score in the long term.

When you apply for new credit, whether it be a standard credit card or a balance transfer credit card, you are deemed a greater credit risk.

The basic concept is that a consumer who needs credit is in a weaker financial position than those who are not requesting credit.

However, those who apply for credit sparingly won’t see a dramatic shift in their credit score, and even if it does fall, the drop should be temporary.

So how could a balance transfer improve your credit score?

Well, the main purpose of balance transfers is to reduce debt, or at least minimize or eliminate credit card finance charges.

This usually goes hand in hand with paying down debt, which should improve your credit utilization.

Credit utilization refers to the proportion of credit available to that you’re actually using, and plays a major role in determining your credit score.

Example:

Credit card limit: $10,000
Credit card debt: $8,000

In our scenario above, you’d be at 80% utilization, which is on the high side and will likely lower your credit score.

If you execute a balance transfer and move half of that debt to a new credit card, the credit utilization would fall to 40% on the old credit card.

Over time, that lower credit utilization, coupled with the expectation that you’d pay down even more debt with the use of a 0% balance transfer, would probably boost your credit score.

Related: Credit score needed for a balance transfer?