Multiple hard credit inquiries will ding your credit score
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I am helping a friend apply for balance transfer cards. She has excellent credit, but her cards have a high interest. Would it be better to apply for one card at a time, waiting to see what kind of response she gets? Or better to apply to two or three simultaneously? I know the credit card application dings her score each time — but does it do that immediately? Or at the end of a month’s cycle? Which would be better? — NJ Mac
Dear NJ Mac,
I can’t help but wonder why a person with excellent credit scores also has accounts with poor interest rates. It’s possible that your friend applied for the cards when her credit rating wasn’t as fantastic as it is today. They may have been her only option at the time.
In such a case, transferring balances to decrease interest rates may not be necessary. She could call her credit issuers and ask for a rate that matches her current rating. Issuers want to keep great cardholders active, so will often do what it takes to make them happy. That includes lowering an APR.
If the issuers aren’t amenable to her request, yes, a balance transfer is a great idea. Depending on the deal, she’ll have a period of time where the new issuer charges no or very low interest on the balance that she shifts over. If she deletes the entire debt before the rate increases to the card’s real APR (which is listed on the application), she can save a bundle, even with the transfer fee (3 to 5 percent of the amount being transferred) added in.
To obtain a balance transfer deal, identify an account with the credit requirements that match your friend’s credit rating. She should apply for that one and wait. The issuer will check her credit with one or more credit bureaus, and that action will temporarily lower her credit score by a few points.
New credit comprises 10 percent of a FICO score, which isn’t much compared to the major factors such as payment history, credit utilization and length of credit history. Those total 80 percent of the score (types of credit in use is also 10 percent). If your friend’s reports show a lot of healthy borrowing and repayment activity, a single application will barely affect her score (by five points or less). Many in a short time span, however, will cause some harm. According to FICO, excess inquiries mean greater risk, and “People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.” For this reason, less is more is better for a score.
However, it is possible that your friend’s credit rating isn’t quite as good as she thinks it is. She may believe her scores are high because she’s never skipped a payment. That would be fantastic, as it’s the most important factor in a FICO (mind that there are other scoring models too, such as the VantageScore, and they weigh information on a credit report using a similar but different scale).
To be sure, before you explore the possibility of a balance transfer, help your friend check her credit scores at either myFICO.com for about $20 each or for free at MyCreditCards.com (for the VantageScore). Whatever scoring model she accesses, all are indicators of lending risk. If those numbers show that she’s in the high-risk category, she may not be eligible for the super wonderful balance transfer offers.
If she does qualify, the transfer can help her credit rating, as it will open up her credit utilization ratio by adding a new credit line. As she pays down her transferred balance, her scores should rise even more, provided she doesn’t add new debt. Then she’ll have less or no debt on the cards she has today, so the amount she can contractually borrow will expand. And since more of her payment will be going toward the balance rather than expensive finance fees, she should get out of debt faster.
See related: How credit score formulas handle multiple inquiries