Don't just transfer a balance, pay it down

Yes, get that 2nd card, but be smarter about it this time


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I'm about to graduate from  college. I'm 25, worked through school, and lived with my parents to help save for said school. That being said, I have minimal student loans (about $5,000), but I feel that I have been less than responsible with my one retail-based card.

I fell for the gas discount this card offered for my 30-minute commute to classes over the three years I've had this card, and have accrued about $3,000 on it. It has a credit limit of $4,500 and a harsh interest rate of 23 percent.

I'd like to know: Is it worth getting a second credit card to move the balance and try for a lower interest rate? What kind of side effects can I expect while I apply for an apartment lease? -- Christopher

Answer Dear Christopher,
As many first time cardholders have discovered, you now know that it can be ridiculously easy to overcharge. When your bank account is as empty as your tank, it's plastic to the rescue. Do so, though, and it doesn't take long before you're stuck in neutral. When interest rates are high and you're just paying the minimum, the principal will barely budge.

Transferring expensive balances to a creditor that will charge less in finance fees is an option, and a fine one. The way it works is that one credit card company takes on the debt of another. There is a cost involved, which is typically 3 to 4 percent of the amount the new company assumes. So transferring your balance of $3,000 would incur a fee of about $100, which would be added to your initial balance. 

The most attractive aspect of a balance transfer is that the new creditor will give you a preferable interest rate -- often 0 percent -- for a fixed number of months. Secure one of these deals and you'll really get ahead -- if you can pay off the entire debt within that time frame.

Take a look at your last bill and see what the fees were for last month. With the balance and rate you have, it's probably around $55. I'm sure you'd prefer to use that money for something else! Now imagine every penny of your payment being applied to what you currently owe. That's exciting! To know how much you could potentially save with a balance transfer, plug the numbers into a balance transfer calculator.

Be aware that you do have to meet a new credit issuer's standards to enjoy such an arrangement. Because you repaid your student loans, your credit report is reflecting that positive information. Presuming you made all payments on time, to the loan as well as your credit card, your credit rating may be good enough to qualify.

The only glitch is the amount of debt you're carrying compared to your credit limit. The lower the ratio of credit used to credit available, the better off you'll be. You are currently carrying a ratio that's likely hurting your credit score. A lender may believe that you're tapped out, so can't afford to borrow more.

To offset this problem, ask your current creditor to increase the credit line to at least $9,000. That would definitely expand the utilization ratio. If they deny your request, you can put the plan on hold and concentrate on reducing the balance as fast as you can by paying far more than the minimum payment. Whittle it down as far as you can. After that you can choose to stay put with your present issuer until it's totally paid off, or apply for a balance transfer for the remainder.

If you do go the balance transfer route, make sure you pay on time. A single late payment can cause that ultra-low rate to escalate sharply. Also, the final rate should be lower than the one you have now, to make it worthwhile. Read the terms of each offer carefully before deciding on the card you want to pursue.

Regarding landlords, most will check your credit reports to determine your financial standing. Moving balances from one creditor to another will probably be irrelevant. They just want to see that you've managed your accounts well, and that your debt won't impede rent payments.

Now you're ready to shift gears and make some progress!

See related: 2015 Balance Transfer Survey: Offers more generous, but move fast, How credit utilization ratio affects your score

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Published: May 14, 2014

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Updated: 10-26-2016

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