Credit score impact of multiple balance transfers
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Dear Opening Credits,
I had a credit card for which I did a balance transfer to an interest-free card. I have kept up to date with my payments, but the new credit card has now started to charge interest. If I transfer again to another interest-free card will that look bad on my credit? -- Kristy
It's a shame you missed out on the complete discount a great balance transfer provides. Can you get in on another? Perhaps, but it may not be the best decision.
As I'm sure you know, the advantage of a balance transfer is the major break you can get on finance charges. When a new credit card issuer takes over the debt that you've accumulated on a high rate card and you pay it off within the advertised time frame (three to 18 months, typically), you won't pay much or any interest. The only cost to you would be the transfer fee, which is often around 3 percent of the amount you move over. The savings can be astronomical.
Here's an example:
Let's say you owe $8,000 on a credit card with an interest rate of 29 percent. If you were to pay a fixed $250 every month, it would take more than five years to pay off and cost about $7,500 in interest. If a different creditor is willing to assume this debt at 0 percent interest for 12 months, the only fee would be the initial transfer cost of about $240 in this case. The catch? You'd have to increase your payments to at least $700. If you didn't, the real rate would kick in on any remaining debt, which could be more or less than what you had with the first creditor.
Without knowing the card's current interest rate and your balance, I can't tell how much you've forfeited by missing the deadline. The good news is that you've made your payments on time and the debt must have lightened. Your credit rating has most likely improved, too, especially if you kept the old card open and have used it responsibly. For these reasons, another balance transfer is possible.
If you feel certain that you can pay the rest of the debt off in a short period of time, review the current roster of transfer offers on this site. Be sure to check your credit scores first though, as you'll want to apply for the card that aligns with your rating. Look for one with the longest and best promotional rate. A low rate thereafter is nice, too.
Balance transfer deals can adversely affect a credit rating, however. Shifting a debt from one creditor to another isn't the problem, but if you max out the new card your credit utilization ratio rises. The amount you owe relative to what you can borrow is a very important factor in the FICO score calculation. A smart rule of thumb is to keep the balance well below 30 percent of the credit line. For a $3,000 debt, the card limit should be at least $9,000.
Before applying for a new card (which will also add a hard pull to your report, an action that can drive a score down a little further), consider other ways to deal with this debt. If you can repay it with large, steady payments in less than a year, I say stick with it.
Here's another example:
If your remaining balance is $3,000 and the rate is 15 percent, you can delete it all in 11 months with steady payments of $300. The total added interest would be only $225. That's more than the $90 or so transfer fee, but you'd preserve your credit scores. In fact, this strategy would definitely help them rise. You'd maintain a long relationship with this creditor, and length of credit history is also a scoring factor.
I've thrown a lot of figures at you, but I think it's enough to make the right decision! You can input different payoff scenarios with the CreditCards.com payoff calculator to figure out what your best approach will be.
See related: 2015 Balance Transfer Survey: Offers more generous
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