Multiple balance transfers: a difficult debt payoff strategy
Your promo APR's ending, the debt's still there. Can you get a another balance transfer?
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Everyone loves a 0-percent introductory rate.
It’s even more valuable on a balance transfer credit card. But what happens if you can’t pay off that balance before that low teaser rate expires? Can you take out multiple, successive balance transfer cards and create an extended interest-free loan?
“I think it may be possible,” says Rod Griffin, director of public education at Experian, one of the three major credit bureaus. “The question is – is it plausible?”
One-off transfers are typical. “It’s not unusual for someone to transfer a balance from one card to another and pay it off,” he says. “What’s unusual is extending that practice.”
As to whether it’s even possible to execute a series of balance transfers, that’s a tough call. “There are too many variables,” says Griffin.
Possible effects of multiple balance transfers on your credit score
It is difficult to predict how getting successive balance transfer cards (and transferring an ever-shrinking balance multiple times) would affect your credit.
A balance transfer (or series of them), touches on a lot of the factors that go into your credit score. Some could help, some could hurt.
“Every time you pull a string, everything moves,” says Griffin.
If your score stays the same or improves, you’re fine. If it takes a serious hit anywhere along the way, that could make getting that next 0-percent card difficult or impossible.
Some of the factors at play with a balance transfer and your score to consider:
- Applying for new credit. Asking for new credit can decrease your score as every time you apply for a new card, a hard inquiry lands on your credit report. The request affects your score for a year and stays on your history for two years, usually just shaving off a few points off your score. If you have a lot of credit and a long history, you’ll feel this less than if you only have a few accounts or are fairly new to credit.
What hurts a credit score most are a burst of hard inquiries over a short period. It signals to the credit scoring algorithms that hard times may have befallen the borrower, so quickly applying for multiple balance transfer cards raises red flags. This category accounts for 10 percent of your credit score.
- Age of credit. The average age of your credit accounts comprises 15 percent of your credit score. Older is better, so a series of new accounts will decrease the average age of your credit, and suppress your score.
- Utilization ratio. This one cuts both ways.
Compare your total credit lines to your monthly balances. That’s your credit utilization ratio, and the lower the better. Carrying a balance hurts your score, since it causes your utilization ratio to rise. Credit utilization represents 30 percent of your score and is the second-most-important scoring factor, after making on-time payments.
At the same time, adding new lines of credit can mean you’re using a smaller percentage of your overall credit, which could help your score, if your balance is much smaller than the credit line.
Bottom line: “There could be very good reasons to do a balance transfer, but improving your FICO score is not a reason,” says Tommy Lee, a principal scientist with FICO.
Multiple balance transfers as a debt payoff plan comes with unknowns
When your financial plan relies on securing a series of credit card accounts sometime in the future, you are literally banking on a plan with unknown factors. Among them:
- Card availability. You’re sitting on a pile of debt. And credit issuers know it. Depending on your credit history, score and their own policies, some companies might not want to give you a card with a super-low intro rate. If your strategy is a consecutive string of 0-percent cards, what happens to that plan if issuers start saying “no”?
- Your teaser rate and promotional period. Until you have that balance transfer card in your hand, you won’t know if you got a low introductory rate or how long that deal will last. That’s the case every time you apply for a card – even when you’ve been “preapproved.”
- Your credit line. You won’t know the size of your credit line until you’ve applied and been approved. “It’s possible that the new limit on your new card is less than the balance on your existing card,” says Dan Arita, credit card product manager for BECU (formerly Boeing Employees Credit Union).
Will 0-percent introductory rate cards continue to be popular with issuers? Interest rates are rising, and there’s no guarantee those offers will be available, says Mikel Van Cleve, a financial planner and advice director for USAA.
Balance transfers require good credit, and what constitutes a “good” credit score today might not be good enough tomorrow. Or issuers could slow or stop issuing 0-percent teaser rates, as they did “during the mortgage crisis,” Griffin says.
Tip: CreditCards.com's balance transfer calculator can help you calculate how much you would save with a balance transfer and how much you would need to pay each month to pay off the balance transferred before the 0-percent introductory period expires.
Multiple card balances: Fees and issuer restrictions to consider
A balance transfer probably isn’t free. Most cards charge a fee, according to CreditCards.com's December 2017 Balance Transfer Survey, those fees average 3 to 5 percent.
A string of balance transfers likely means a string of balance transfer fees. Do the math and see what you’ll actually save.
Video: What is a balance transfer credit card?
Card issuers' rules may prevent consecutive balance transfers, by, for example, limiting the number of new card accounts within a set period.
Issuers may view a string of card applications negatively. “It may be hard to qualify,” says Arita. “Each lender has its own industry criteria. And many lenders, us included, see a lot of recent applications for credit as a red flag.”
Many issuers – including Chase, USAA and Wells Fargo – prohibit balance transfers from one of their cards to another from the same bank.
And some issuers may not allow you to use all of your new credit line for a balance transfer, says Griffin. USAA, for example, caps balance transfers at 95 percent of the balance-transfer card’s credit limit.
If the credit line is large enough, still “there may be restrictions on how you can use it,” he says. “It’s critical you understand what the contract says – what your obligations are.”
Balance transfer done right
A balance transfer credit card “could save you time and money,” says Van Cleve. Even if you cannot know whether multiple, successive transfers is doable, start with one good one.
Understand the teaser rate, when it ends, and what the new rate will be.
Make sure you pay on time. With some cards, one late payment means the end of that teaser rate, says Arita. “Set up automatic payments,” he advises.
Understand the terms of each promotional period offered by the card.
Making new purchases on the balance transfer card? Think again. “The rates and limits could be different,” says Arita.
When considering a balance transfer card, look for these terms and make sure to understand them:
- Purchase intro APR: If the card offers a purchase intro APR of, say, 12 months, that means any purchases made with the card will carry a low or no interest rate for the duration of that period – but in most cases, you will still have to make at least the minimum payment every month.
- Balance transfer intro APR: It refers to the no-interest period the card offers on balance transfers.
- If your card doesn't offer a purchase intro APR, it means that a regular APR will apply on any purchases you make with the card at any time.
- Some balance transfer cards may offer both a purchase intro APR and a balance transfer intro APR, but each may come with different conditions – the former may last, for example, six months, while the latter may extend through 18 months.
Keep the old card open (to protect your utilization ratio), but put it on ice.
“The other downfall can be if you transfer a balance from Card A to Card B, and start charging on Card A again,” says Van Cleve. “It’s a hard habit to break.”
Sometimes, when it comes to money, consistency and simplicity are the best way to go.
“One of the things I’ve found is that when people get creative with their finances, that’s when things go wrong,” says Griffin. “If you’re trying to figure out a creative way to pay down your debt, it’s going to be difficult at best. In the end, it’s common sense that’s going to win out.”
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