A balance transfer can help you pay down your credit card debt more quickly. But before you attempt one it's worth considering the potential impact on your credit score. That can be either positive or negative, depending on how you go about it. Here is what you need to know.

How Balance Transfers Work

In a balance transfer, you open a new credit card account and transfer all or part of your existing credit card balances to it. Some credit cards are promoted for this purpose and may offer low or even 0% interest rates on balance transfers for a certain period, such as 12 or 18 months. However, these credit cards often charge transfer balance fees, such as 3% to 5% of the amount you transfer.

How Balance Transfers Can Help Your Credit Score

If transferring your credit card balances to a new card makes it easier for you to pay down your debt, that will help your credit score (and save you money in the bargain).

One of the major factors that goes into computing your credit score is your credit utilization ratio. That's how much revolving debt you currently owe as a percentage of the total credit available to you. For example, if you owe a total of $10,000 on your credit cards and their credit lines add up to $20,000, your credit utilization ratio is 50%. In general, lenders favor credit utilization ratios under 30%, and the lower the better. In fact, FICO, the major credit scoring company, recommends keeping it under 10%.

In addition, simply taking on a new credit card can lower your credit utilization ratio. Using the example above, if your new card offers a $10,000 credit line, you would now have $30,000 in total available credit, so your $10,000 in debt now translates into a 33% credit utilization ratio. Then, as you pay down your debt, your credit utilization ratio will decline even further.

How Balance Transfers Can Hurt Your Credit Score

Unfortunately, simply applying for new credit cards can hurt your credit score, although usually in a minor way and only briefly.

When you apply for a new credit card, the card issuer will request your credit report from one or more of the major credit bureaus to see how much you already owe and how you have handled your debts in the past. That is referred to as a hard inquiry, or hard pull, and it can temporarily ding your credit score. (There are also so-called soft inquiries, which will have no effect.)

The negative effect will multiply if you apply for more than one card at roughly the same time. So, for credit score purposes, it makes sense to limit your applications to a single balance transfer card that you believe you will qualify for. You will also want one that has a large enough credit line to absorb all of the debt you are hoping to put on it.

Another way that your credit score might take a hit is if you close the credit accounts that you are transferring balances out of. That's because the average age of your accounts can be another factor in the scoring formula, with older being better. So plan to keep the old accounts open even if you don't use them very much or at all.

After You Transfer Your Balances

Once you've successfully completed the balance transfer, the next step is paying down your debts, ideally before the low- or no-interest promotional period runs out. And, it probably goes without saying, but try to resist the temptation to use more credit and pile on more debt.

The Bottom Line

Balance transfer cards are a great debt-management tool and can help you raise your credit score if you use them to pay down your account balances. However, bear in mind that applying for too many cards can do some damage to your score, as can closing the old accounts that you are transferring balances from.