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While credit card companies place a high importance on customer retention, they also spend millions of dollars each year in an effort to attract new customers by stealing them away from other banks. By offering balance transfers, credit card companies allow consumers to transfer outstanding debt from their current credit cards to new accounts. Balance transfers carry many benefits and can help you save money, pay down your balance faster or consolidate debt. When transferring credit card debt, however, it’s crucial to remember that doing so could have an impact on your FICO scores.



Credit Utilization and FICO Scores


The FICO scoring formula is a trade secret, but the Fair Isaac Corporation – the company that owns the mathematical formula behind the FICO score – has released basic information about its scoring method to the public. One feature of your credit report that has a considerable impact on your FICO scores is your credit utilization ratio.

Your credit utilization ratio is the difference between your total credit card debt and available spending limits. The higher the gap between the two, the better you can expect your FICO score to be. Carrying a low balance sends the message that you are not only financially secure enough not to rely heavily on your credit cards but also possess responsible debt management skills. Transferring debt from one credit card to another can impact your credit utilization in either a positive or a negative way.



New Credit Card Balance Transfers


Your credit utilization ratio doesn’t apply to only one account. It applies to all of your revolving accounts as a whole. When you apply for and receive a new credit card prior to your balance transfer, the available spending limit on the account factors into your credit utilization ratio – boosting your credit score.


When transferring your balance to a new account, its imperative that you transfer an amount lower than your spending limit. If, for example, the credit limit on your new account is $1000 and you transfer $1500, the transferred debt exceeds your spending limit and negatively impacts your FICO scores.



Credit Inquiries


The credit inquiry conducted by the credit card company when you apply for a new account is yet another factor you must consider when transferring your balance from one card to another. The credit card company’s credit inquiry has a slight negative effect on your FICO score. On average, you’ll lose no more than five points per inquiry. If you applied with numerous credit card companies, however, damage from credit inquiries will add up. Your FICO score will subsequently reflect this damage.



Existing Credit Card Balance Transfers


If you plan to transfer your unpaid balance to an existing credit card, your credit isn’t likely to feel the impact. Because the amount of you owe and your spending limit on each card isn’t changing, your FICO score remains the same.


An exception to this rule exists if the new card’s spending limit is less than the debt itself.

As previously noted, this can lower your FICO score even if your total available credit on all of your credit accounts combined remains the same.


Transferring your current debt to a credit card with a lower interest rate is a wise financial decision that will save you money. When conducting the balance transfer, however, keep your FICO score in mind and tread carefully. Credit damage you incur now can haunt your credit report for years to come.