Matt About Money

Pay off loan with balance transfer card?


Using a 0 percent balance transfer card to pay off a high-interest personal loan can be smart if done right

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Dear Opening Credits,
I want to know how much opening new credit cards affects my credit score. After graduating college about a year ago, I had significant credit card debt, and with my higher income I was able to take out a personal loan through a credit union with an interest rate of around 13 percent. I no longer carry a balance on any of my credit cards, but I have not closed any of them. I currently have about 11 open accounts. I’m unsure of my exact current credit score number, but I know it’s 700-plus. I frequently receive card offers in the mail with 0 percent interest and no fees on balance transfers for 15 months. What I’m thinking of doing now is applying for a couple of these cards, using the balance transfers to pay off the personal loan and just pay off the credit cards within 15 months, which would save me a lot of money in interest as well as have my loan paid off 3 years early. In the long run, this seems like the best route, however, I am also anticipating applying for a home loan later this year. So, basically I need to know if this is a good idea or will it end up having a negative effect on my credit? Oh, and I also plan to close these accounts once the balance is paid off.  — Erica


Dear Erica,

To summarize, it seems you have the following four desires:

  1. Pay your consumer debt down quickly.
  2. Reduce the amount you pay in interest.
  3. Preserve your healthy credit score.
  4. Borrow for a home in the immediate future.

You can achieve the first three goals simultaneously. When you do, you’ll ensure the last is also achievable.

First get your credit scores. They’re available for about $20 per credit report from, and an increasing number of card issuers offer credit scores for free. With the numbers in hand, you’ll know if you need to drive them upward or make sure they don’t deteriorate. You’re quite right that you’ll need scores that are at least in the mid-700s (which is considered excellent) to be eligible for the best mortgage rates. The amount of the down payment and what you earn are also factors, of course.

Then, get your credit reports. You can pull them for free from once a year. Because you’ll be shopping for a home loan soon, you’ll need to see what’s on your files now. This way you can dispute any negative errors you may spot long before a lender does.

Now for your debt. Let’s get it down!

Using 0 percent APR balance transfer cards to pay off a high rate loan can be smart, but only if you delete the balance before the rate increases. This way every dollar you send will go toward the debt, making repayment faster. And even with the balance transfer fee (typically 3 to 5 percent of the amount you shift over), you can save big money.

To know the total amount of fees and interest you can escape, call the lender and ask how much of each payment is comprised of interest. Most personal loans do not have prepayment penalties or exit fees, but check just in case yours does. Then just tally the months’ worth of interest that you have remaining. For example, if its $45 each payment and you pay it off three years early, the savings would be $1,620, minus the balance transfer fees the new creditor would charge. If there is fee to repay it early, deduct that too.

Be careful when applying for these new credit cards, though. Seek accounts with the longest 0 percent rate time frame and the lowest rate after that (since you probably want to keep and use them). Most demand applicants have good to excellent credit scores, which it looks like you have, as well as sufficient income to support the payments. Spreading the debt among two or more cards will be wise, because if you hit the limit with one, your FICO scores would decline until you pay it down.

Also crucial: Determine a fixed payment that will guarantee that you’ll be in the black before the 0 percent rate expires, and never pay late, as it could nullify the deal. A $5,000 balance, for instance, would require steady payments of $334 to pay it down in 15 months, which is the time frame for the offers you mention.

Do all this and your scores should be fine (or finer), because FICO calculates payment history and credit utilization — your debt-to-credit-limit ratio — as the most important factors. It’s true that credit applications will affect a score, but not by much. According to the myFICO website, “While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your scores are how timely you pay your bills and your overall debt burden as indicated on your credit report.” However, every point can count to a mortgage lender. If you can’t afford to sacrifice a few points, you may want to avoid doing the balance transfer dance entirely. Instead, just concentrate on paying your current loan off by sending as much money as possible to it every month.

Finally, there is no ideal number of credit cards a person should possess for scoring purposes, yet each open but empty credit card gives you borrowing potential. The ability to rack up many thousands of dollars overnight can spook some mortgage lenders. Before closing any accounts, ask the lender if closing some cards will work in your favor. Even if the answer is no, still consider trimming your plastic to just what you need after securing the home loan. As each account requires management, streamlining will make your life easier!

See related: 2015 Balance Transfer Survey: Offers more generous, but move fast, 5 steps to a mortgage-worthy credit profiles


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