Do Balance Transfers Affect Your Credit Score in Canada?

Many Canadians wonder if transferring a credit card balance will hurt their credit score. 

While applying for a balance transfer card can cause a small, temporary dip due to a hard inquiry, with responsible use, it can actually help improve your credit score over the long run. 

In this article, we explain how balance transfers work, their short-term and long-term effects on credit, and provide tips to minimize any negative impact. 

How Do Balance Transfers Work in Canada?

With a balance transfer, you can move debt from one or more high-interest credit cards to a new one. Ideally, you want to find a card that offers a low or 0% introductory interest rate. Typically, introductory periods last for six to 18 months; after this time, the interest rate increases to the standard, higher rate. 

A balance transfer card can help consolidate your debt into one monthly payment. If you’re able to pay off all, or most, of your balance during the introductory period, you can save on interest and potentially pay off your debt sooner.  

Most balance transfer credit cards charge a transfer fee, which is a percentage of the amount you transfer. The fee is usually added to your credit card balance. For example, if you transfer $5,000 with a 3% fee, the credit card issuer will add an extra $150 to your balance, so it’s worth working out if the money you’ll save on interest will exceed the transfer fee.

Let’s look at an example calculation. Say Michelle has a credit card with a balance of $10,000 and an interest rate of 19.99%. She can currently afford to pay off $500 per month, which means she’s paying around $160 per month in interest, at least for the first few months. She’s considering a balance transfer to a credit card with 0% interest for the first 12 months, but there’s a 3% transfer fee, which will add $300 to her balance. However, because she will pay around $1,600 in interest over that 12 months if she keeps the balance on her existing card, it still makes sense for her to do the balance transfer and incur that $300 fee, as it will be more than offset by the savings in interest paid.

How do Balance Transfers Impact Your Credit Score?

In the short term:

Applying for a balance transfer credit card requires a hard credit check, which can lead to a temporary, minor dip in your credit score in the short term. 

However, in the slightly longer term, opening a new card can improve your credit score by increasing your available credit and lowering your credit utilization ratio. 

Your credit utilization ratio represents how much of your available credit is in use at one time. Experts recommend keeping your credit utilization below 30%. 

For example, if you have $5,000 in available credit and a balance of $3,000, you have a ratio of 60%. ($3,000/$5,000 = .60).

If you open a balance transfer card with a $5,000 limit, you’ll increase your available credit to $10,000 and decrease your utilization ratio to 30% ($3,000/ $10,000 = .30). 

In the long term:

A balance transfer's long-term impact on your credit score depends entirely on your credit management skills. If you leverage the lower introductory rate to pay down debt faster, because more of your monthly payment goes toward the principal instead of interest, you'll likely see a positive impact. This benefit comes from two key areas: decreasing your credit utilization and establishing a stronger payment history.

However, there is a risk: if you are tempted to use the credit you've freed up on the original card, you could easily end up in significantly more debt, spread across multiple cards. This would leave you in a worse financial position than when you started, and could damage your credit score due to raising your credit utilization and increasing the risk that you’ll miss a payment due to mounting debt.

For this reason, it's crucial to be honest with yourself about your ability to resist using that available credit.

We generally don't recommend closing credit cards, as this can shorten your overall credit history, especially for older accounts. However, if you feel you are at high risk of overspending the credit you've made available, you might consider closing the high-interest card once the transfer is complete. Alternatively, if you are confident you won't misuse the available credit, we recommend keeping the card open to preserve your credit history and maximize its length.

Is a Balance Transfer a Good Idea?

Whether a balance transfer is a good idea depends on a few factors, including: 

• Current debt. If you’re carrying high-interest debt, a low or 0% balance transfer credit card can help reduce the amount of interest you’re paying, allowing you to put more towards your principal and pay off your debt faster. 

• Credit history. With a strong credit history, you have a better chance of qualifying for a low or 0% interest balance transfer credit card. With a bad credit score, you may find your options are more limited.

• Repayment plan. If you transfer balances from your high-interest cards to a new card, and then continue to use the old cards, you risk accumulating more debt. Make sure you have a realistic plan in place to repay your debt before the end of the promotional period. 

• Transfer fees. Before you decide on a balance transfer, calculate the transfer fee and compare it to the potential benefits to determine if it's worth it.  

What Can I Do To Protect My Credit Score During a Balance Transfer?

If you decide a balance transfer is right for you, there are a few steps you can take to protect your credit score, including: 

• Always make your minimum payment. Your payment history is the most important factor in determining your credit score. While you want to aim to pay off as much of your balance as possible, pay at least your minimum on time to protect your score. One late payment on a balance transfer credit card can cause you to lose your promotional rate.  

• Avoid new credit applications. Each time you apply for credit, a hard inquiry is required. This can cause your credit score to drop. Plus, opening more credit when you’re trying to pay off debt may tempt you to spend more.  

• Aim to keep your credit utilization low. Tracking your credit utilization ratio can help you manage your debt. If your utilization ratio starts to go up, you can make a payment or reduce your spending. 

• Monitor your credit score. Regular monitoring of your credit score can help you quickly identify any mistakes or possible fraud.

Can I Transfer Balances From Multiple Credit Cards?

Yes, many balance transfer cards allow you to transfer multiple card balances, but only up to the maximum credit limit. This allows you to consolidate your debt, making the repayment process more manageable. Instead of dealing with multiple cards, interest rates, and payment deadlines, you can focus on one. 

Carefully review the terms and conditions of your balance transfer card to see if there are any potential limitations. For instance, will the issuer charge a separate transfer fee for each transfer? Is there a limit to how many cards you can transfer at one time?

What Should I Do If My Credit Limit Isn’t High Enough To Do A Full Balance Transfer Of All My Debt?

If the maximum credit limit on your balance transfer card isn’t high enough to consolidate all of your debt, it’s possible to do a partial transfer. This way, you can reduce the interest you’re paying on a portion of your balance. 

To get the greatest benefit from a balance transfer, prioritize your highest interest debts. 

Does closing the old card after a balance transfer affect my score?

Closing your old card after a balance transfer can affect your credit score in a few ways. 

• Shortens your credit history. Creditors look at how long you’ve had your accounts open. Generally, they want to see that you can handle credit over a long period of time. Closing one of your oldest cards can reduce your average account age, which can negatively affect your credit score.  

• Increases credit utilization. Closing an old card can also reduce your total available credit, which can increase your credit utilization ratio. 

If your old card doesn’t have an annual fee, consider keeping it open to prevent a drop in your credit score. Making a few minor purchases and paying them off immediately will keep your card active. 

If your old card has a high annual fee or you want to avoid unwanted temptations to spend, you might decide it’s worth closing the card.

What Is The Best Balance Transfer Credit Card In Canada?

To find the best balance transfer card for you, consider these key factors: 

• Interest rate. The lower the interest rate, the more you can save. Look for a balance transfer card that offers a 0% introductory rate. 

• Introductory period. A longer introductory period gives you more time to pay your balance at a low or 0% interest rate. 

• Fees. Calculate the cost of fees, including the balance transfer fee and any annual fees.  the balance transfer fee, and if there’s an annual fee. These costs can add up quickly.  

• Credit limit. Ideally, you want to find a transfer card with a credit limit that’s high enough to consolidate your entire balance.   

The Bottom Line

With the right balance transfer card, it’s possible to reduce your interest rate and simplify debt repayment. When managed responsibly, a balance transfer can help improve your credit score by increasing your available credit and lowering your credit utilization ratio. Lower interest payments can make it easier to pay your bills on time, strengthening your payment history.