About two weeks ago, I signed up for GoFreeCredit. With this program you get access to your credit scores from TransUnion, Experian, and Equifax. I had recently signed up for myFICO’s free credit score program, and I wanted to compare the two.
One thing that I immediately noticed was just how many credit cards I have. Only one has a balance, which is from a balance transfer offer I took advantage of last December. But the reason I have so many cards is because of the many balance transfer deals I’ve used over the years. And that got me to wondering whether applying for a balance transfer offer will hurt your credit score.
It seemed to me that applying for any credit card would lower your credit score, at least initially. Credit card companies pull an applicant’s credit history, and such inquiries are a negative factor tending to lower a FICO score. A card issuer may not pull your credit history from each of the three major credit bureaus, so the negative impact on a credit score may only occur with one of the agencies. On the other hand, I recently applied for a Capital One business credit card, and Cap One pulled my credit from all three! But whether the credit history is pulled from one, two or all three bureaus, it will weigh on a credit score.
And with balance transfer offers, there is one more factor that could result in a lower score–high balances. When we get a balance transfer card, we typically max out the credit limit on the transfer. This makes sense as we want to take full advantage of the 0% introductory offer. But maxing out on a card is also a negative factor when calculating a credit score. As the card is paid down, the extra available credit may in the long run actually improve your credit score, but in the short run, it would seem to lower your score. On a positive note, if we are using the new card to transfer other credit card debt, our total debt is not increasing.
But the big question for me was whether there was a way to predict just how much a new balance transfer credit card would affect my credit score. It turns out there is, and the results really surprised me. Both myFICO and Equifax offer a credit score simulator. These tools allow you to predict what your future credit score will be if you take certain actions such as maxing out or paying off your credit cards, applying for a mortgage, or getting a car loan. One of the simulations offered is what impact applying for a balance transfer offer will have on your score.
My current credit card debt is about $20,000. It’s that high because I took advantage of a 0% balance transfer offer last December that had no balance transfer fee (the offer is no longer available). I transferred about $20,000 from my home equity line of credit that I had used for a home renovation project. So I entered that into both the MyFICO and Equifax simulators. Now keep in mind that my FICO score is slightly different with each, largely having to do with the timing of when I pulled my last score report with each. Anyway, here were the results of the simulation:
Equifax: My current score of 749 would change to a score somewhere in the range of 734 to 764.
MyFICO: My current score of 768 wold change to a score somewhere in the range of 763 to 803.
I was surprised to see that the worst case scenario was a loss of just a few points. Of course, the effect of applying for a new balance transfer offer will certainly vary from one person to the next, as both MyFICO and Equifax make clear:
“In today’s market, many consumers take advantage of credit offers with lower interest rates and transfer balances between accounts in order to benefit from these lower rates. The impact of this strategy on your FICO® score will vary depending on your current profile.
As a result of opening a new account, a new credit account (and possible inquiry) will be posted on your credit report — this can impact your score. In addition, the information on your revolving accounts will change, which could raise or lower your score, depending on your profile.
This simulation is based on your applying for and receiving a new credit card with a limit of at least $20,000 and then transferring balances to it.
Bottom Line: The effects of credit card balance transfers are unique for each individual. This is because there are many factors to consider, including the terms of the transfer as well as other relevant information on your credit profile.”