Does a balance transfer hurt your credit score?

In the UK, many credit card providers offer “balance transfers” which are designed to help you manage and pay off your debts by moving them onto lower interest rate credit cards, with some providers offering an introductory 0% interest rate. When used responsibly, balance transfers can save you £100s over time and can feel like a lifeline if you’re struggling with debt. But can balance transfers hurt your credit score? Let’s look into it.

What is a credit score?

When asking “do balance transfers hurt your credit score?”, it’s important to understand what your credit score is and how it affects your finances. Your credit score is a three-digit number that summarises your credit history, giving you an idea of how likely it is that your credit applications will be accepted, and what interest rates you’ll be offered. 

‍In the UK, Credit scores are calculated by the main three Credit Reference Agencies (CRAs): Experian, Equifax, and TransUnion. CRAs collect information from lenders about how you manage your debts and use it to build your credit report. When you make future applications, lenders can then check your credit report to make their decisions.

Read this blog post for more details on Credit Reference Agencies, how they work,and the difference between them.

When applying for loans, mortgages or credit cards, lenders often do hard credit checks on your report to work out how risky it is to lend you money. The higher your credit scores, the more likely you are to get the best deals. Better interest rates can save you £1,000s on large loans like mortgages. That’s why it’s good to keep your credit healthy.

You can find out more about hard vs soft credit checks on your credit report here.

What is a balance transfer?

Simply put, a balance transfer involves moving existing debt from one credit card to another, usually with a lower interest rate, sometimes with an interest-free period. This can be an easy way to manage your money by consolidating debts and getting relief on interest payments. That can help you pay off your debts and reduce the total amount owed. But it’s important to put a plan in place to make sure you can handle the repayments. 

If you’re struggling with debts, whether they’re on credit cards or not, it can be a good option  to shift them into one place where you can control the interest rates. Often, when you apply for a new credit card, you can find offers and deals giving you interest-free periods, or lower introductory rates. The lower the interest rate, the more you’re likely to save on repayments. 

How do balance transfer credit cards work?

When you apply for a balance transfer credit card, the lender will usually run a hard credit check to confirm your identity, review how you’ve managed credit in the past, understand how much you could afford to repay,  and ultimately decide whether they’re willing to offer you credit. 

If you’re approved for a balance transfer credit card, the lender will usually confirm a few details, including: 

1. The amount of credit they will offer you — this is your “credit limit”. 
2. The rate of interest they will charge you on the balance — e.g. how much it will cost you to borrow the money. 
3. How long any introductory low-interest rates will last.

Once you have your credit card, you can instruct the balance transfer provider to transfer the balances from your other cards. 

You will often need to pay a transfer fee. The amount of this fee will typically depend on how much money you’re moving onto the new card. You might decide that fees are worth paying to get the benefits of the interest rate reduction, but  it can be a  good idea to do your sums to make sure it is worthwhile.

Will a balance transfer hurt my credit?

If you’re considering moving your debts from one credit card to another, you may be wondering: "Do balance transfers hurt my credit?” Well, it’s not a simple yes or no answer. While the act of transferring your balance from one card to another has no impact on your credit score, applying for new credit cards definitely can.

To do a balance transfer you’ll of course need to apply for a new credit card to benefit from its introductory offer. Even if you’re successful in your application, you may see a temporary reduction in your credit scores. This is because of the hard credit check.  As you begin to repay the balance,  it’s likely that your credit score will improve as your credit utilisation decreases. Bear in mind that you will need to make payments on time, and always pay the minimum payment. 

If you choose to apply for more than one credit card to improve your chances of being accepted, or to spread your debt across more lower interest offers, balance transfers can hurt your credit score because lenders might think that you’re struggling with your finances 

Cancelling previous credit cards might have an impact on your credit score because lenders like to see old, well-used credit lines. Closing your old agreements lowers the average age of your credit accounts. You may also reduce your credit utilisation rate, which is how much of your available credit you’re using. Lenders like to see less than 30% usage of your available credit, so closing unused balances can reduce your score.

Can a balance transfer help my credit score?

So does it always hurt your credit to transfer balances? The good news is no. While there are things that may indirectly impact your credit score, there are potential benefits too. The main positive that a properly managed balance transfer can have is getting your debts under control and showing responsible money management.

By consolidating your debts into a manageable situation, and paying off what you owe, you can work to lower your credit utilisation rate and showcase responsible activity. That’s what lenders love to see. And it can give your credit score a boost,too. By clearing high interest payments you give yourself a better chance of paying off your debt faster.

Can I do a balance transfer with bad credit?

The short answer is yes, it's possible. But it’s important to be aware that the interest rate offered on your new credit card may not be as good. Explore options, keeping an eye on the fees and interest rates. A balance transfer might still be a good move to break free from your high-interest debt and work towards a better credit score.

Having a bad credit score, which might be labelled as ‘poor’ or ‘very poor’, isn’t a dead end for doing balance transfers. But you may be seen as more of a risk to lenders, which in turn might make them less likely to offer you new lines of credit. And even if they agree to approve your application you might find that the deals you’re offered aren’t as useful.

You may be offered a shorter interest-free period, or a smaller total credit limit. The interest rate that kicks in after your introductory period may also be as high, or higher, than the interest you’re already paying. If you have a poor credit rating, you can still consider doing a balance transfer, but you may want to do more research about your options. 

How can I reduce the impact of a balance transfer on my credit score?

To minimise the short-term effects of a balance transfer on your credit score, avoid opening multiple new credit accounts simultaneously. Pay attention to the credit limit on your new card and strive to keep your overall credit utilisation low.

 It’s better to research the best credit options for you, and to check your credit score regularly, than to apply for multiple cards at the same time.

You can check your credit score for free (and without having an impact on it) using these recommended services. Some of these companies also help you compare balance transfer offers, and give you an idea of how likely you are to be accepted:

• ClearScore (uses Equifax data)*
• Experian App (uses Experian data)
• Intuit Credit Karma (uses TransUnion data)‍

* For transparency, if you decide to sign up to ClearScore using this link, we’ll receive a small commission.

If you’re worried that your credit report will impact your ability to do balance transfers, get started with Loqbox to boost your credit score. 

Improvements to your credit score are not guaranteed.

Remember, it’s important to actually repay the debt that you’re moving onto a new card. The benefit of a balance transfer is that it boosts your ability to pay off debt. You may not be able to clear everything you owe before introductory periods lapse, but to make the most of a balance transfer it’s a good idea to  have a plan to pay back as much as you can.

Once the interest-free period has passed you may again have to pay off higher interest rates. To avoid jumping your debts from one card to another, which has the potential to damage your credit score further over time, work out your repayment plan.

So, should I do a balance transfer?

When thinking about doing a balance transfer, it’s important to consider your financial situation and your money goals. Balance transfers can be powerful tools to help you beat your debts. But they work best when they are supported by a clear and realistic repayment plan. 

If you manage your money responsibly, a balance transfer could help you to move your debts into one place, lower or remove the interest you pay (at least for some time), and boost your repayment power. But weigh up the benefits against a potential, indirect credit score dip. 

Remember, the deals you’re offered will likely end and then you may need to do another balance transfer. As long as you have a good plan in place, and are in a position to make repayments, balance transfers could save you money through the interest rate reduction. But they don’t wipe the slate clean themselves. 

So, if you’re in a position to make repayments, a balance transfer can give you a better chance of clearing your debts. By removing the interest payments everything that you pay back goes straight into your debts. Make sure your repayment plan is in place and check out fast and proven ways of growing your credit score in case it takes a small hit.