A balance transfer is a great way to eliminate short-term debt, but it can have an impact on your credit score
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Staring down a big post-holiday credit card bill? Consider a balance transfer credit card, but be mindful of the potential impact to your credit score.
“The FICO score is always going to be more concerned about how balances may be changing and whether new accounts are getting added to the credit bureau files,” said Can Arkali, principal scientist for analytics and scores development at FICO. “The balance transfer itself doesn’t actually get special treatment within the FICO score calculation.”
Here’s how to pull off a balance transfer with little or no harm to your credit:
Find a balance transfer card with a 0 percent introductory offer. Payment history is the most important factor in FICO’s traditional credit scoring model. A balance transfer card with a limited, no-interest period can help you wipe out your debt faster without missing payments or incurring extra charges.
A handful of issuers offer cards that charge no fees for balance transfers and no interest for several months. Typically, a balance transfer fee of 3 to 5 percent will be tacked on the amount you move to the new card. Chase’s Slate card, however, currently allows you to transfer a balance for free within the first 60 days of membership and charges no interest for 15 months. The BankAmericard Credit Card and the Discover it card are offering no interest for 18 months, but each carries a 3 percent fee for any balance that is transferred to the card.
With a no-interest offer, develop a plan to pay off the balance before the bonus period ends and stick to it. Carrying a balance beyond the introductory period in this case is counterproductive. Also just as important: Don’t add to the balance and don’t start charging again on the card that now has a zero balance or you’ll defeat the purpose of wiping out high-interest debt.
When your budget allows it, pay more than the minimum amount needed each month to eliminate the debt within the promotional period. This will decrease your chances of being tripped up by interest charges once the promotional period expires.
Avoid other new cards for a while. If applying for a new card on which to transfer the balance, a hard inquiry will appear on your credit report. Each new credit inquiry – whether for a card or any type of loan – can cause your credit score to temporarily drop by a few points. The new card may also lower the overall length of your credit history, which accounts for 15 percent of your FICO score. Meanwhile, new credit – 10 percent of a consumer’s FICO score – can help or hurt you, depending on how many new accounts you’ve opened recently and the overall health of your existing accounts.
Resist the temptation to sign up for any other new cards within a few months of applying for your balance transfer card. Bonus rewards are sweeter now than at any other time in recent memory, but a lot of hard inquiries and new accounts may give prospective lenders the impression that you are struggling with your finances.
“If you have multiple offers and you’re accepting more than one within a three- or four-month period, that’s not the way to go,” said Martin Lynch, director of education at Cambridge Credit Counseling. “Accepting one offer generally has a negligible impact.”
If you have multiple offers and you’re accepting more than one within a three- or four-month period, that’s not the way to go.”
|\u2014 Martin Lynch|
Director of Education, Cambridge Credit Counseling
Keep the old card open. Don’t close the card from which you transferred the balance, especially if you’ve had it for a long time. Doing so could significantly lower the length of your overall credit history.
“Closing that trade line is not a good idea,” Lynch said. “A lot of folks that we see have done that, and it’s such a simple mistake to make.”
If you’re afraid that keeping the old card open will tempt you to start using it again, put it in a sock drawer or shoebox and leave it there for a while.
Pay close attention to credit limits. Your new balance transfer card’s limit will expand your overall available credit, which can reduce your credit utilization ratio if you tend to revolve balances on other cards. Keep in mind that you will not know the balance transfer card’s credit limit until you receive it from the issuer. If the balance you wish to transfer exceeds the new card’s limit, your best strategy going forward will depend on the old card’s limit.
Barry Paperno, a credit scoring expert who writes the Speaking of Credit column for CreditCards.com, said transferring a balance equal to the new card’s limit might help your credit score if the old card was maxed out prior to the transfer. In this scenario, you would still have 100 percent utilization on one card, but overall utilization would decrease because you would have more credit available. Paperno said that while both overall and individual account utilization factor into FICO’s model, the former is more important.
If the balance you’re transferring is low relative to the old card’s limit, maxing out the new card might hurt your score, particularly if you have no other highly utilized accounts.
However, maxing out the balance transfer card may be the best option in either scenario, as it minimizes the amount of interest you’ll be charged on the old card.
Evaluate your spending habits. Think about why the balance you transferred got so high in the first place and how you can avoid a repeat scenario. If it was the result of a one-time expense, such as an annual vacation or a much-needed big purchase, you may not need to adjust your spending habits. But if the availability of credit has encouraged you to live beyond your means, establish a strict budget or consider seeking the help of a credit counselor.
Shifting a large, expensive balance from one card to more affordable one is nothing to be ashamed of. The balance transfer is one of the best tools available to save on interest costs over the short term. But opening multiple new cards and spending heavily on your old cards while your transferred balance doesn’t get paid off during a low-rate promotional period is a recipe for credit score disaster.
“Different circumstances can lead individuals to consider and pull the trigger on balance transfers,” Arkali said. “As long as they continue to demonstrate that they are more than capable of managing credit as responsibly as possible, they can attain good FICO scores.”