Credit card debt is an expensive problem to get out of. You are paying very high interest rates likely between 12-29% APR. If you just pay the minimum payment you could easily pay 50% of the purchase price of the items you bought in interest. It is easy to get into credit card debt by spending more than you earn and not tracking how much you can really afford to spend. If you are paying high interest rates you might consider transferring the balance to another credit card. Credit card companies are constantly sending out offers to your mailbox to entice you to transfer for your balance over. It can be tempting to drop your high interest rate to 0% for a few months, but can transferring your balance from one credit card to the next lower your credit score?
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The short answer is it is possible, but it doesn’t have to be. Transferring your credit card balance to a new credit card doesn’t always lower your credit score. Here are the things you need to understand in order to protect your credit score.
3 Major Points to Consider
If you do decide to open a new credit card account and transfer your balances to the new card, be careful! Do not close your old credit card account out. Simply transfer the balance and leave the account open.
Your credit score is comprised of 5 major categories:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
If you close your old credit card account you are negatively impacting your amounts owed (debt utilization) and length of credit history.
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1. Closing Your Credit Card Account Increases Your Debt Utilization
Let’s say you only have one credit account and have built up $7,000 in credit card debt. Your maximum credit line on the card is $16,000. With a $7,000 debt, your current debt utilization is 43.75%. If you open up a new credit card to transfer your balance, you are likely to be approved for (and only ask for) the amount you need to pay off. You don’t want extra credit available because you know you’ll spend it. So you transfer your $7,000 balance to a credit card with a $7,000 credit line. Your debt utilization jumps to 100% from 43.75%. This can impact your credit score negatively.
2. Closing Your Credit Card Account Can Reduce the Length of Credit History
Using the example above, if your old credit card account with the $16,000 limit was open for 10 years you have a solid credit history. If you close the account and transfer your balance to the new $7,000 credit limit card, not only have you increased your debt utilization, but you have also drastically reduced your length of credit history. You’re dropping a 10% card for a brand new card, and that can lower your credit score.
3. Too Many New Credit Card Accounts Is Also Bad
On the other hand, it is also a bad to open too many credit card accounts in a short period of time. Although this decreases your debt utilization, having too many accounts, high revolving credit limit, and many credit pulls are all negative factors that will lower your credit score.
Focus on Paying Off Debt
While it can be nice to get a “break” from paying credit card interest, the balance transfer game is a dangerous one. If you close your old credit card account you risk lowering your credit score. If you keep the credit card account open to avoid lowering your credit score, you put yourself at risk at getting back into debt again on the old card. Using a balance transfer can save you money, you just have to smart about it and have a lot of self-discipline to not get back into debt.
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.