How will a balance transfer affect my credit rating?

TAMIKA SEETO

Finance Journalist · 19 November 2021

Under the right circumstances, a credit card with a balance transfer offer could help you pay down credit card debt. But it’s important to consider this strategy carefully and whether it could affect your credit score or lead to further debt.

What is a credit card balance transfer?

A credit card balance transfer involves transferring your credit card debt to a new credit card with a 0% or low-interest rate, which may make it easier to repay your debt. The no or low-interest rate is typically only offered for a limited time, so you’ll need to pay off your credit card debt before this promotional period ends. After the promotional period, you’ll be charged interest and this rate could be higher than the rate on your original credit card.

Some cards won’t let you transfer the full amount from your current card, so it’s worth carefully looking at the interest and fees you could be charged if you end up with multiple credit cards. It’s also important to avoid or limit new purchases on the card, as you will usually be charged a different interest rate on purchases.

What is my credit score?

Your credit score or credit rating is a number that may be used by lenders to help them decide whether to approve you for credit or lend you money. It is typically between 0 and 1,000 or 1,200, depending on the credit reporting body (Equifax, Experian or illion). The higher your credit score, the more creditworthy you are seen to be. Your credit score is based on information in your credit report.

→ You can check your credit score for free

Does a balance transfer affect my credit score?

When you apply for a credit card with a balance transfer offer, this is noted on your credit report. If you apply for multiple credit cards in a short space of time, this can negatively impact your credit score.

Here are some ways a balance transfer could affect your credit score:

Number of applications. If you make a number of applications within a short period of time, Equifax notes this will flag you as a greater risk than if you make infrequent applications with only a few credit providers. Credit enquiries stay on your report for five years.
Repayment history. If you are approved for a balance transfer credit card but are unable to meet the regular minimum repayments, this could also have a negative impact on your credit score. Your repayment history stays on your report for two years, while defaults stay for five years.
Remaining credit cards. If you do not close your old account, you’ll also need to be careful that you make your repayments on time for both cards. If you don’t, this could also negatively impact your credit score. It’s wise to close your old account if you can so you won’t be charged two sets of fees and don’t accumulate more debt.
Multiple transfers. If you are unable to repay your credit card balance at the end of the promotional period and have to move the remaining amount to another credit card, this would also be noted as an enquiry on your credit report.

How to prevent a negative credit score

If you do decide to transfer your credit card balance to a new card, here’s some ways to prevent your credit score taking a dip:

Don’t apply too often. Try to limit the number of applications you make for credit and spread out your applications, as this can have less of an impact on your credit report.
Review the terms and conditions. Before applying for a balance transfer credit card, carefully go through the terms and conditions. Ensure you meet the eligibility requirements (such as the minimum income and credit score requirements) and have all your documentation at hand to help ensure your application isn’t rejected. You can request a copy of the Target Market Determination (TMD) and Product Disclosure Statement (PDS) for a credit card directly from the issuer.
Pay on time. As we’ve mentioned, late payments can have a negative impact on your credit score. On the other hand, if you are able to regularly make your payments on time this could be good for your credit score.
Avoid new purchases. Avoid using your card to make purchases. A different interest rate usually applies to purchases and your repayments may go towards paying off the new purchases first, rather than the balance you transferred.

Cover image source: garagestock/Shutterstock.com

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This content was reviewed by Editor-in-Chief Nina Rinella as part of our fact-checking process.

Tamika is a former Finance Journalist at Canstar. She covered banking and general insurance. She has a Bachelor of Journalism and Bachelor of Laws (Honours) at QUT. Her work is regularly referenced by major publishers, such as The Guardian, ABC, Yahoo Finance, The Motley Fool and The Conversation.