Maxing-out credit limit for balance transfer can hurt score

This post originally appeared December 8, 2016 on CreditCards.com as “With balance transfers, watch your individual card utilization

By Barry Paperno

Dear Speaking of Credit,
One of my older cards is offering me a 0 percent interest rate until May 2018. I’m tempted to transfer my Wells Fargo card balance of $4,750 at 9.5 percent to it. It will be the second time this year that I’ve moved money to take advantage of a 0 percent offer. Will my score take a hit or not? Note that these two cards in question are already on my credit report. – Heather

Dear Heather,
Whether your score takes a hit will likely hinge on a seldom discussed set of card utilization (balance/credit limit percentage) calculations within the “credit utilization” scoring category – the individual card calculation.

The general idea behind card utilization is that the more credit you have used up, the higher your future repayment risk. High credit utilization lowers your credit score.

There are two parts to card utilization calculations:

  1. Combined card utilization – the percentage of total card balances/total credit limits.
  2. Individual card utilization – a card-by-card look at balance/credit limit percentages.

In their influence on the score, combined card utilization tends to weigh more heavily. Yet some additional credit score points can be won or or lost, depending on the how much debt you transfer to an individual card, and the size of its credit limit.

You’ve said you won’t be opening a new card for the balance transfer, which could be a good thing, since adding a new card to your credit report can lower your score if it lowers your average account age and posts a hard inquiry on at least one credit bureau report. Or it could be good for your score if these negatives are outweighed by the new card’s additional available credit effectively lowering the combined proportion of balances to credit limits.

By not opening a new card and avoiding any net card balance increases, neither the total card balances nor credit limits used in utilization calculations will be changing with this balance transfer. The result will be a continuation of the same combined card utilization percentage you’re seeing presently. As for your individual card utilization percentages, expect to see some changes as the transfer will rearrange the ratios.

When assessing the overall scoring impact of a balance transfer, it’s easy to see how having low individual card utilization percentages among all of your cards would lead to low combined utilization. What may not seem so obvious is that you can have one or more highly utilized cards and still achieve a relatively low combined utilization percentage when the highly utilized cards are offset by some nonutilized ones.

Credit utilization examples
To illustrate, let’s look at how balances moving from one card to another can affect your score via changes to the individual utilization percentages – even when the combined percentage doesn’t change.

The following simulations show how changes to individual utilization percentages can occur when a balance is transferred between Cards A and B. In each of the two examples we’ll assign your balance transfer amount of $4,750 to the card receiving the balance transfer and a $0 balance to the card being paid off. We’ll also use a couple of simulated credit limits that are different enough to demonstrate how individual utilization – and scores – can change with balance transfers, regardless of the combined percentage.

Example 1. Highest individual utilization drops to 24 percent, following a balance transfer from the lower to higher-limit card.

Transfer from card B to card A Balance after transfer Credit limit Utilization
Card A – individual $4,750 $20,000 24%
Card B – individual $0 $5,000 0%
A & B – combined $4,750 $25,000 19%

Example 2.  Highest individual utilization increases to 95 percent, following a balance transfer from the higher to the lower-limit card.

Transfer from card A to card B Balance after transfer Credit limit Utilization
Card A – individual $0 $20,000 0%
Card B – individual $4,750 $5,000 95%
A & B – combined $4,750 $25,000 19%

What we can learn from these exercises:

  • In each of the two examples, the combined balance, credit limit and utilization figures don’t change with the balance transfer.
  • In each of the two examples, we assume the paid-off card is left open, not closed, as a $0 balance card must remain open to be included in any utilization calculations.
  • Example 1 provides the better individual card utilization outcome, and a likely score increase, as the highest individual utilization percentage falls from 95 to 24 percent.

So, while we don’t know nearly enough about your credit picture to say whether your score will or won’t take a hit from a balance transfer, tailoring the above utilization calculations to your particular situation should help clarify whether you should expect a higher, lower or the same score following this balance transfer. Make sure to look at the credit limit of the card you are transferring the balance to. If you’re going to eat up almost all the credit limit with your balance transfer, you can expect a credit score hit.

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