Reader Question: Why Did my Score Drop When I Transfered Balances?

Answering reader questions about credit sometimes requires a bit of detective work. You rarely get the full story. Today's question comes from Paul:

Recently I was advised by Experian that my credit score decreased because I paid off one of my high interest credit cards by transferring the debt to Chase.

All I was doing was trying to be a good steward of my credit by eliminating on payment and doing it at a lower rate.  I over pay my credit cards every month and have a perfect record on all my debt.

How can they dock you for trying to do the right thing?

It sounds like Paul misunderstood the score explanation that Experian provided (and who can blame him. those "reason codes" are notoriously tricky). I'm betting that the damage to his credit score was not from the transferred balance, but instead from the fact that he probably closed the high interest credit card after the switch. 

Transferring debt balances between existing accounts has little impact on credit scores because the debt utilization ratio that counts for 30% of your score is calculated as a total of all the credit limits and all your balances. As long as your limits don't change, the ratio stays the same.

However, closing credit card accounts can cause major credit score changes. Closing an old, established account with a high credit limit is especially damaging. In fact, closing credit cards earned the No. 1 spot on our list of the top 10 credit mistakes people make. 

Paul might have considered leaving his old expensive account open after transferring the balance in order to avoid credit score damage. In his case, the old account came with a hefty $12 a month fee and not closing it would have cost him.

It certainly doesn't seem fair, but it is really never a good idea to close old credit card accounts when it comes to your credit scores. The system is set up to reward consumers who keep accounts open for 7+ years and who have a high amount of available credit limits.

Do you have a credit question? Send it to our team of personal finance experts at tidbits@credit.com.

Emily Davidson is editor of CreditBloggers.com and a former credit expert for the credit bureau, TransUnion. She writes about credit and personal finance topics.

Comments

[Alex]

I have a question: How long after you stop the 0% credit card game (by paying off your 0% balances) does it take for your credit score to normalize again?

[EmilyPeters]

Hi Alex, Your credit score instantly adjusts once changes are made to your credit report data.

For example, if you had a large amount of debt and a 60% debt to limit ratio and then paid it off to have a 10% debt to limit ratio, your credit score would improve as soon as the new debt balance was reported.

[Alex]

thanks!

[lulu]

hi
can a credit card company continue to charge me a monthly fee, when the balance is zero. closing the account would cost my score to be lowered.

[EmilyPeters]

Hi Lulu - They can continue to charge you even if you don't have a balance. In this situation, you might want to close the account.