Low utilization boosts balance transfer deal approval odds


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 have a $3,000 credit line on a card that has a $2,800 balance. I want to do a balance transfer that has a 0 percent interest rate promotion for 12 months. Do I need to pay the balance down first? – Krys


Dear Krys,
Balance transfer offers can be great because the resulting savings can be huge. For example, if your credit card has an APR of 24.9 percent and you just sent the minimum payments ($84 in the beginning, then declining until it plateaued at $25), it would take 188 months to delete the debt, and $5,010 in interest fees! However, if you were to transfer the $2,800 to a 0 percent card and pay it off in a year, all it would cost you is the transfer fee – usually around 3 percent of the balance. In your case, that would be a paltry $84.

There are two major "ifs," though:

1. If you qualify for a balance transfer card.

This is where we come to your question about whether you need to pay down your balance a bit before trying for a transfer. Many credit issuers that offer these deals are interested in taking on the debt of people who appear to be financially capable and responsible. To know that, they’ll review your application for your income information and check your credit rating.

The amount you owe relative to the amount you can contractually borrow is a major credit scoring factor. If the credit card you mention is the only account you have, your credit utilization ratio is poor because you’re nearly at your limit. On the other hand, if you have other accounts with no or low balances, that ratio may not be so bad after all. That’s because the credit scoring formulas look at the utilization of individual cards, and also at the combined utilization of all cards.

Check your scores to see where you stand. FICO and VantageScore are the two major scoring systems in use. They’re different companies, but they both have scales starting at 300 and going up to 850. Most credit issuers that extend balance transfer opportunities require applicants’ credit ratings to be good to excellent. That would be scores in the 700s on up.

2. If you can afford the higher payments.

To repay the entire balance ($2,884, which includes the industry-standard 3 percent transfer fee) in a year, you’d have to send at least $248 per month. And that’s with a static debt, so that means no more charging on the account. If you don’t pay the balance in full, the remainder will be subject to the account’s real interest rate, which will obviously be much higher than the teaser rate. Also, if you miss a payment during the promotional period, it usually triggers the deal to disappear early, so you’ll be back to where you started – a large and expensive debt.

Review your financial picture to know how much you can realistically pay each month. If you can manage payments, you’ve got this “if” settled.

If you’re not eligible for a balance transfer now, that’s OK. Another option is to design your own plan with your current credit card. Determine the maximum amount you can send as a fixed payment and stick with it. Suspend charging during this time, too. Your credit rating will rise as your balance decreases.

Once you’ve whittled the balance down to below half the credit card’s limit, call the issuer and ask if they’re willing to reduce the APR for you, based on your recent activity. If the answer is yes, wonderful. You won’t have to do anything but keep up the good work. But if it’s no, reconsider moving on. Your credit rating may be improved enough to qualify for a balance transfer!

See related: Forget the 30 percent credit utilization ‘rule’ – it’s a myth, 2015 balance transfer card survey

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Published: May 11, 2016

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Updated: 10-22-2016

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