Does balance transfer count as credit utilization?

The Balance Transfer Boost: How It Affects Your Credit Utilization and Score

Many consumers diligently track their spending, pay bills on time, and carefully manage their finances. However, one key metric that often flies under the radar, despite its significant impact on credit scores, is credit utilization. Understanding how different financial maneuvers affect credit utilization is crucial for maintaining a healthy financial profile. So, where do balance transfers fit into the equation? The answer is a bit nuanced but generally positive.

Understanding Credit Utilization: The Cornerstone of Credit Health

Before diving into the specifics of balance transfers, let’s first define credit utilization. Simply put, it’s the amount of credit you’re using compared to your total available credit. It’s expressed as a percentage. For example, if you have a credit card with a $5,000 limit and a balance of $1,000, your credit utilization is 20%.

Credit bureaus consider credit utilization a significant factor when calculating your credit score. Experts generally recommend keeping your utilization below 30%, with the sweet spot often considered to be below 10%. High credit utilization signals to lenders that you might be overly reliant on credit and could struggle to repay debts.

Balance Transfers and Credit Utilization: A Double-Edged Sword?

Now, let’s address the core question: Does a balance transfer count as credit utilization? The answer is yes, but with important caveats.

When you transfer a balance from one credit card to another, the balance on the new card becomes part of that card’s utilization rate. This is where things get interesting.

• Scenario 1: Transferring to a Card with Available Credit: If you transfer a balance to a credit card that has plenty of available credit, you’re likely to lower your overall credit utilization ratio. Let’s illustrate with an example:

  • You have two cards: Card A with a $2,000 limit and a $1,500 balance (75% utilization), and Card B with a $3,000 limit and a $300 balance (10% utilization). Your total available credit is $5,000, and your total debt is $1,800, resulting in an overall utilization of 36%.
  • You transfer the $1,500 balance from Card A to Card B. Card A now has a $0 balance, and Card B has a balance of $1,800.
  • Now Card A has 0% utilization, and Card B has 60% utilization ($1800/$3000). Your total available credit remains $5,000, and your total debt is still $1,800, but your overall utilization has dropped to 36%. While overall utilization remains the same as before, the removal of the 75% utilization on card A is beneficial.

• Scenario 2: Opening a New Card Specifically for Balance Transfers: This is where you can really see a positive impact on your credit utilization. Adding a new credit card with a significant credit limit specifically for balance transfers effectively increases your total available credit. This, in turn, lowers your overall credit utilization, even if the new card carries a substantial balance due to the transfer.

  • Using the previous example, imagine you open a new Card C with a $5,000 limit and transfer the $1,500 balance from Card A to it.
  • Card A now has 0% utilization, Card B has 10% utilization, and Card C has 30% utilization ($1500/$5000). Your total available credit is now $8,000 ($2,000 + $3,000 + $5,000), and your total debt remains $1,800. Your overall utilization is now 22.5% ($1800/$8000) – a significant improvement!

Important Considerations:

• Balance Transfer Fees: While balance transfers can positively impact your credit utilization, be mindful of balance transfer fees. These fees, typically a percentage of the transferred amount, can offset any potential savings from a lower interest rate.
• Interest Rates After the Introductory Period: Pay close attention to the interest rate that will apply after the introductory period of the balance transfer offer ends. If you don’t pay off the balance before the promotional period expires, you could end up paying a higher interest rate than you were before.
• Closing Old Accounts: While tempting to close the card you transferred the balance from, avoid doing so immediately. Closing accounts lowers your overall available credit, which can increase your credit utilization. Consider keeping the old account open (if there are no annual fees) and using it sparingly to maintain credit activity.
• Don’t Run Up More Debt: The primary goal of a balance transfer should be to pay down existing debt more effectively. Avoid adding new charges to any of your credit cards while you’re working on paying down the transferred balance.

The Verdict: A Powerful Tool When Used Wisely

In conclusion, a balance transfer does count as credit utilization on the card it’s transferred to. However, by strategically using balance transfers – particularly by opening a new card with a high credit limit – you can significantly boost your available credit and, consequently, lower your overall credit utilization ratio. This lower utilization can lead to a higher credit score, potentially opening doors to better interest rates on loans and credit cards in the future. Just remember to carefully consider the fees, interest rates, and your spending habits to ensure that the balance transfer truly benefits your financial health.