Does balance transfer affect credit score? - Yes, it can hurt your credit score
Q: Does balance transfer affect credit score? I want to make a balance transfer from my Capital One to Discover. I am paying 15% interest with Capital One whereas Discover is offering 0% balance transfer for 6 months with no fees. Afterwards, all I have to do is to charge Discover card twice a month for as little as I want, and the 0% deal on the transfer amount will last as long as I do it. So this is one sweet deal. My only concern is my credit score. Discover gives me only $6,200 credit limit and I have $8,400 with Capital. I want to transfer $6,100, has to keep $100 cushion. So does such balance transfer hurt my credit score?
A: Yes, it does affect your score, but not necessarily hurt it. This is all about utilization rate which is the percentage ratio between your balance and credit limit. For scoring purposes this ratio should be kept under 30%. Obviously you are about to max out the Discover after such a transfer and utilization rate of 98% ($6,100 / $6,200) is going to affect credit score rather negatively. You may lose anywhere from 20 to 100 points of your score depending on your overall credit history in general, and on the number of other revolving accounts and their utilization rates.
To lessen the impact on your score you should keep your Capital One open until you drop the balance on Discover. Still, will this balance transfer affect you credit score? Yes, because you're opening a new revolving account and maxing it out right away. FICO algorithm does not like that. But it won't hurt your score as much. The question of course will be if Capital One lets you keep the account open. Even if you have some balance left, they may force you to pay it in full within 90 days or so and close it. Sill the deal is very good to pass on it.
The other way to look at this is instead of asking - does balance transfer affect credit score, ask how soon my credit score will recover. It may start recovering almost immediately as you start paying the Discover balance down. Once you pay it down to around $3,500, you score will likely get back half of what it lost initially. You're looking only at one straight, card to card transfer. Things get much more complicated when you:
- consolidate two or more credit cards into one
- transfer few different balances from one or few cards on the new ones within a month or two
- transfer installment loans (mortgage, auto, student) on credit card or cards
- close your old cards while maxing out your new ones
I personally have done all these things, and once saw my very established and diverse credit falling by 110 points, from high 700s to not so high 600s, only to recover within 3 months after I brought the balances down. I did close two older credit cards. In other cases, my scores got hurt less dramatically. I also saw other people's scores hurt more or less when they transfer their balances.
Finally you must understand that balance transfer affect credit score differently for different scores. Read Repair credit score for the right type of loan if you are not sure what I'm talking about. There you'll learn that such a card balance transfer is much likely to hurt your score which is used to qualify you for an auto loan, than affect your score for a mortgage.
Tue Sep 1, 2009 08:09PM | Copyright: www.bad-credit-advisor.com | More in Credit Score Help | Comments (0)
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