Inquiries and new accounts both ding your credit score, so choose carefully
Dear Speaking of Credit,
I just lowered my car interest rate and have 24 months left. At the same time, I’m using my credit to finance a used car for my son. I want to transfer my credit card balances to a lower percentage rate, but I’m afraid it will look bad to apply for a balance transfer at the same time as I am financing another automobile. How long should I wait? — Lyndi
It’s good that you’re being cautious about applying for credit, as there are some credit-scoring downsides that can occur once a credit application is submitted, whether successfully or unsuccessfully, that every credit applicant should know.
I take it your fear of “looking bad” after recently refinancing your auto loan and financing your son’s car is that card issuers might look askance at all of your recent activity and jeopardize your balance transfer card application.
Your first concern over a lender looking disapprovingly at you for having recently obtained that auto loan — or any recent credit — might be valid if you were applying for a mortgage. In that application process, recent loans and loan applications are evaluated critically, along with debt-to-income ratio and other factors.
Fortunately, when it comes to a balance transfer card application, there isn’t necessarily that same concern by lenders. Your credit score is likely to be more critical than any other single factor, so let’s look at how you can maximize your score before applying for a balance transfer card.
One impact immediate, one delayed
From a credit scoring perspective, the reason exercising caution before applying for any new credit is always good is that you can expect at least one of the following score-impacting items added to your credit report as part of any credit card application, whether that application leads to approval or denial:
- An inquiry instantly appears on your credit report with the initial credit check and, whether a card application is approved or denied, typically results in an immediate scoring loss of up to five points.
- A new account typically appears as a trade line on your credit reports at all three major credit bureaus — Equifax, Experian and TransUnion — within about 30 days of approval, and often leads to a few more lost points.
I have no way of knowing to what extent, if any, this will be a problem for you, since I don’t know your score or anything about the makeup of your credit report. One positive sign we can take from what you’ve shared is that your score was good enough recently to qualify you for a car loan refinance; though, the credit score requirement for an unsecured balance transfer card could be higher than it was for your secured auto loan.
Since you appear to be approaching this process with your eyes open, I would strongly suggest that if you haven’t done so recently, check your credit scores from all three credit bureaus. I say all three bureaus because you won’t know in advance of applying which credit bureau a lender will use to pull your file.
Though for most purposes any brand of score will tell you whether you have good or bad credit, for this purpose I’m going to suggest obtaining your FICO scores from myFICO.com or the credit bureaus individually, as doing so will get you closest to previewing the score a lender will use. You may also be able to view one of your FICO scores on a monthly credit card statement if you’re fortunate enough to use a card that provides scores on statements.
Lenders will grant your balance transfer application if your score is high enough, but they don’t publicly reveal the exact cutoff points. Generally, balance transfers require good to excellent credit, so while there are no guarantees, if your score is 720 or higher, consider yourself to be within the credit approval ballpark.
If your score isn’t quite there, you still may qualify for some balance transfer cards, but don’t forget that you could be adding insult to injury if you roll the dice and apply, are denied, and the additional inquiry knocks your score down even further. Instead, continue taking the cautious route to a higher score by making all of your payments on time over the coming months without adding to any of your card balances or applying for new credit.
As a last bit of advice, whatever your score may be, do some diligent credit shopping for the one balance transfer program that best meets your needs, and make it the only one you apply for. While you’re at it, don’t forget to check out the balance transfer rates, fees and amounts available on any existing cards you have, but are not currently using. The best, quickest and certainly the easiest way to look good to a future lender might not even require applying for any new credit at all.