Ready to Transfer Credit Card Balances? Read This First!
Offers to transfer credit card balance to a low-interest card might be seductive. I’ll save money and lower my parents, you might think.
Not so fast! Before you transfer a credit card balance, be sure you understand how the process can benefit you or hurt your credit score. That’s right—it could hurt you.
Let’s take a look at how the process of transferring a balance from one credit card to another works. Traditionally, the process begins with a credit card with a large balance or a high interest rate. Once another card offers you an opportunity to transfer your balance to a new card with a lower rate, you may decide to put part or all of your balance on the new card. By doing this, you can pay off the old credit card, secure a new and better interest rate, and possibly enjoy the rewards, options, and specials associated with the new card. However, you should be mindful of two things before taking advantage of this seemingly smart strategy.
Transfer Credit Card Balances? Consideration #1: Pay attention to your credit card balances. It may seem like a straightforward idea to put all your balances on the card with the lowest interest rate, but keep in mind how credit-scoring bureaus come up with their ratings. Thirty percent of your overall credit score is produced by the balance you carry versus your credit limit, or your utilization rate. To keep a solid credit rating, your utilization rate should never be more than 30 percent of your limit. Many people rack up balances in excess of a 30 percent utilization rate after transferring money to new cards, and as a result, their credit score takes a big hit.
In fact, you should always wait until the card is opened to transfer credit card balance. Do not transfer the entirety of your balance while opening the account. Most creditors will decide your limit depending on the amount that you request to transfer. If you transfer $6,000, for instance, the creditor will determine credit limit to be $6,000, giving you a very dangerous utilization rate of 100 percent. The smarter way to proceed is to act cautiously: open the account first and transfer balances from other credit cards only after you know the limit and calculated the utilization rate. Then, only transfer 30 percent.
Transfer Credit Card Balances? Consideration #2: Never open a card just to transfer the balance. Having a ton of credit cards might lower your credit score as the credit bureaus know that you have the opportunity to dig yourself into massive debt and start missing payments. In a perfect world, you would have between three and five credit cards. If you already have five cards, don’t close them (this could also hurt your score), but don’t open new ones either, even if you think you’ll be saving money by transferring balances and lowering interest payments. In fact, you might end up lowering your credit score so much that you pay extra interest payments on all future loans. You should always make sure that all of your credit cards help with an overall credit-building strategy, so never open a card just so you can take advantage of a low introductory rate.
Once you have dodged these pitfalls, you might be ready to transfer credit card balance. As always, though, be sure to thoroughly read all the related fine-print associated with credit card offers. Some cards may have specific restrictions or fees associated with transfers. Making sure that you understand the extra benefits as well as restrictions of new cards could allow you to shrink your balances and perk up your credit score.
