How a balance transfer card can boost FICO score

Opening Credits columnist Eric 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 for the expert

Dear Opening Credits,
I want to increase my credit score to prepare for home buying and currently have one credit card, of which 80 percent of the credit limit is used. I understand the ideal limit for spending is 30 percent. If I were to transfer the balance to a credit card with 0 percent APR for 12 months, then spilt the balance in half on both cards after 12 months, would this negatively affect my credit score? -- Monica

Answer for the expert Dear Monica,
Not only can you hike your score to appeal more to a mortgage lender with a balance transfer deal, you'll also delete your debt more efficiently. As long as you do it right, that is.

First up, your score. It's true that holding big balances relative to the amount you can contractually borrow will drive your FICO score down. That's because credit utilization is a major scoring factor. But while FICO won't reveal exactly how much is too much to owe, the 70:30 ratio rule is a decent guideline. For example, if you can borrow up to $5,000 on your cards and your total balance is less than $1,500, you should be fine, score-wise. The lower the balance, the better.

Since, at 80 percent, your debt load is high compared to your charging limit, opening a new account will automatically expand your borrowing power.

To illustrate, let's say you have that $5,000 credit limit card. An 80 percent balance would be $4,000. However, if you add a card with a $15,000 limit, suddenly you can borrow up to $20,000 -- and your ratio drops, causing your score to rise!

The other reason balance transfers can be great is that you won't have to pay so much in finance fees. Even with the typical transfer fee of around 3 percent of the amount you shift over, a lengthy 0 percent interest period is pretty incredible. That means every dollar of what you send to the creditor will go toward the principal. To know how much you can save with a balance transfer, plug your numbers into this calculator.

Do take note that when you apply for credit, your score will take a slight, temporary hit when the creditor checks your credit history. However, that shouldn't stop you from pursuing a new line of credit.

Deleting debt quickly absolutely helps with your mortgage aspirations, as the lender will have hard evidence that you are capable of managing your financial obligations well. So clearly, rather than hurt your credit scores, balance transfers can help, especially if you continue to use both of the open accounts in an ultra-responsible way. All you need to do is focus on repaying the new account (and deleting the balance within the promotional rate timeframe), while using the other card for expenses that you will repay in full and on time.

Simple, right? Maybe not. What concerns me is that you do owe a lot on a credit card but don't mention the underlying reason. Plenty of balance transfer deals begin with noble intentions: I will not add more to my debt! I will live within my means! I will put all of my money and energy into getting into the black and staying there for good!"

And yet, that doesn't seem to always happen. Old habits are hard to break. If you leaned on the credit card to pay for things you couldn't afford before, you could slip into that pattern again, unless you're extremely dedicated and conscious of each financial action. Now is the time to change all that. Track your spending, construct a budget, sell off items you don't need to repay what you owe faster (there are even apps to help you with this!). Work more. Save a little each month.

In other words, you can use all the tools and tricks that are available, but if you don't manage your money and credit positively over the long term, you'll be back into trouble again -- but with fewer options for resolution.

See related: Credit score impact of multiple balance transfers, Debt shifting helps your score, but paying it off is better, Pay off loan with balance transfer card?

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Updated: 02-21-2019