Credit Score and Balance Transfers

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A good credit score has its perks. Credit card companies may send you interest credit card offers with a 0% interest rate. But if your credit report gives them a less favorable credit history on you, you may still receive lower interest rate credit card balance transfer offers in order to tempt you to transfer one or more balances over to their credit card. But beware…

What You Should Know About Balance Transfers

Credit cards are big business for financial institutions. After checking your credit report and credit score, financial institutions may choose you to offer balance transfers from your old credit cards to theirs, hoping you will see it as an attempt for debt relief. But they know there is a big chance you won’t be able to pay it off before the grace period ends and the actual interest rate kicks in…probably 20% or more.  The grace period is anywhere from six months to eighteen months.

Transferring Your Balance May Lower Your Score

There is a FICO formula that determines your score. FICO is fickle. Taking advantage of the lower interest rate to pay off credit card debt, which is a good thing, can actually hurt your credit score.  If your balance transfer offer is on a credit card account you already hold, then it might not be as bad. But, if you open a credit card just to take advantage of the lower interest rate, it can badly hurt your FICO score.

Using the balance transfer to consolidate credit card debt? Think twice, maybe three times. By consolidating debt, your score is lowered again. Why? Because it will appear that you are closer to maxing out your credit limit on that card. If you have to make balance transfers, try not to consolidate the balances into one card.  Spread the amount thinner to keep that gap between the amount of credit you are actually using and what is available to you farther apart.

I always told my husband I needed to have more credit cards…to spread the wealth around. I actually liked seeing lower balances on several cards rather than a larger balance on one card. He insisted I use only one because it was easier to track my spending…LOL. I guess my instincts were right!

What this means is that FICO would rather see you have $700 on four different cards with limits of $5000 rather than $2800 on one card with a limit of $5000.

Check the Credit Card Offer Small Print

Liz Pulliam Weston of MSN Money and Market Watch gives this advice:

If you’re planning to take advantage of a balance-transfer offer, read the fine print and consider the following:

  • Limit the number of accounts you open. If you want to improve your credit scores, don’t keep bouncing your balances from card to card.
  • Pay down your debt. Use the lower rate as an opportunity to reduce your debt load. Paying off debt is good for your wallet and good for your credit scores.

And from Nana,

  • Be sure to figure in the cost of the transfer fee which may be around 4%. Ask if the transfer fee is on each balance transfer to one card!
  • Call and ask questions of the customer service person to go over the small print.
  • If you do transfer to another credit card, don’t use it for additional purchases. By doing so, you may not be able to pay it off by the end of the grace period…and you may not get another offer!
  • If you leave the original credit card account open, put the card away so you aren’t tempted to use it. A home safe is a good place to keep your credit cards.
  • And those checks they send you? You’ll pay a transfer fee on each one you write after you call to activate them!

Before you do a balance transfer, get your free credit report first. After you review your free credit report, think about whether you want to go through with this. Will the balance transfer help or hinder your credit score?

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