Financial & FICO balance transfer impacts

This post originally appeared July 30, 2015 on CreditCards.com as “How credit reports handle balance transfers.”

By Barry Paperno

Dear Speaking of Credit,
I have a few credit cards I want to do a balance transfer on. My question is, if I do a balance transfer, do the cards I transferred show up on my credit report or just the one I transferred the others to? Does that make sense? — Leah

Dear Leah,
Yes, your question makes a lot of sense. The answer is that with a balance transfer, the cards from which you transferred a balance will continue to appear on your credit report, as will the new or existing card to which the balances are transferred. It typically takes many years for a credit account of any kind — whether a card or loan — to come off your credit report once it’s no longer in use.

While closed cards typically remain in your credit file for up to 10 years from the closing date, open accounts in good standing remain indefinitely, which can be a very good thing since those cards can provide a positive influence on your score for as long as they are a part of your credit report. And you can go a long way toward protecting your credit score just by leaving those accounts open and in use via occasional small purchases that are paid in full, without incurring interest, by the due date.

Keeping cards open ensures that:

  1. For years to come, they continue to contribute positively to your score’s payment and length of credit history calculations, which together comprise about half of your score, and
  2. Their presence helps minimize your combined credit utilization (total balances/limits) percentage, as all open and active cards continue to be factored into these calculations that make up almost one-third of your score.

By “balance transfer,” we’re simply talking about moving existing balances from one or more credit accounts to a single credit card to achieve a lower — or even zero temporarily — interest rate and/or lower monthly payments. The card receiving the transferred balance can either be existing or one newly opened — often specifically for this purpose.

To gauge some of the credit scoring effects a balance transfer might exert on your score, it’s important to know that transferring balances among your existing accounts without any new cards or credit limit increases shouldn’t have much, if any, effect on your score. This is due to the fact that your combined credit utilization, which carries more weight than individual card utilization (the extent to which each card is utilized), essentially remains unchanged when the total balance and amount of available credit (credit limits) stays the same.

Effect on your credit score
When opening a new card for a balance transfer, a few additional scoring variables come directly into play as a result of adding a new account to the credit mix. These factors can have a positive, negative or neutral effect on your score, with some possible examples being:

  • On the positive side, with all other balances and limits being equal, if the new card has a high-enough credit limit so that the transferred balance makes up a smaller proportion of the limit than at least one of the cards from which the balances came, both your combined and individual utilization percentages should go down and your score up.
  • On the negative side, if the new card’s limit is only marginally higher than the transferred balance, or worse, if the new card is now maxed out, the resulting downside to your individual card utilization percentages could outweigh any possible upside of lower combined utilization achieved when the new credit limit is added to your total available credit.
  • Having a neutral effect, the negative scoring effect of taking on a new account and the card issuer’s hard inquiry (components of the “new accounts” scoring category that makes up about 10 percent of the score) could negate any of the scoring advantages brought on by lower individual or combined utilization percentages — though any such new account category-related harm should only be temporary.

Aside from the credit scoring impacts of a balance transfer, and perhaps even more importantly, there are some strictly dollars-and-cents financial factors to be aware of before beginning a balance transfer:

  • Penalty APR. If you’re even one day late with the minimum monthly payment for a transferred balance, some cards will not only penalize you in the form of late fees, but also impose a higher interest rate from that point forward.
  • Loss of grace period. If you faithfully pay your charges off each month without interest, a transferred balance carried from month-to-month could cause you to lose that interest-free grace period you currently enjoy on purchases for as long as any portion of that transferred balance remains.
  • High interest after promotion expires. An introductory period that includes zero or low APR is usually followed by a higher rate charged on any portion of the transferred balance that lingers after the introductory period ends.
  • Transfer fees. A balance transfer fee — typically about 3 percent — tends to accompany most balance transfers, though many of the promotional programs offering zero or low APR also waive these fees.
  • Annual fees. Though becoming rarer and rarer, some credit cards offering otherwise advantageous balance transfer terms may come with an annual fee.

Balance transfers can provide an excellent way to pay off debt over time by reducing the cost and/or monthly payments. Just bear these scoring and cost ramifications in mind and you’ll be able to make a balance transfer decision that will best achieve your goals.

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