A balance transfer, sending a balance on one credit card to another account, could be the best thing for driving down your credit card debt balance, but it might cost you more in the long run by potentially lowering your credit score. The act of the transfer itself does absolutely no harm to a credit score, but it can affect your credit utilization ratio or make you miss payments.
Identification
The credit score algorithm used by the national credit reporting agencies does not acknowledge a balance transfer. However, the FICO score formula considers your overall credit utilization -- total credit card debt divided by your limit across all cards -- and the credit utilization on each card. If you transfer all your balances to one card, you might have a very high credit utilization ratio on that account. Maxing out a credit card might cost you up to 45 points on your credit score, according to Bankrate.
Opening a New Account
Many people transfer balances when they receive an offer for a new credit card offering to charge zero percent interest. The application for a new credit card initiates an inquiry into your credit report that costs a couple of points on your credit score. Opening a new account lowers your average account age, which accounts for 15 percent of your total credit score.
How It Might Help
If transferring balances to a credit card with a very low annual percent yield -- some cards charge nothing but the minimum for the first six to 18 months -- helps you to eliminate your credit card debt, it ultimately helps your credit score by bringing your credit utilization to zero. By paying off credit card bills, you also lower your total debt burden, which makes you more attractive to future lenders.
Considerations
The balance transfer might take a few weeks to process. In that time you must pay at least the minimum on the original account. If you miss a payment, the original account will show a 30-day late payment, or more if you miss payments for several months. A single 30-day late payment takes at least 60 points off the average credit score.
Tip
Call your credit card company to see if it will match the interest rate offered by another card. Lowering the interest rate on the current card saves you from a hard inquiry it takes to get a new credit card and lowers your score a few points. Also, factor in whether you can pay off the transferred balance. Zero-percent transfers may sound enticing, but it is better in the long run if you can get a credit card with a very low fixed rate -- somewhere below 10 percent -- when you have credit debt that might takes years to pay off.
0 comments:
Post a Comment