NEW YORK (MainStreet) — If you're like a lot of people, you get lots of credit card offers in the mail. And with those offers come promises of zero-interest balance transfers. While tempting, are they a good option for you and your family finances? A lot of times a balance transfer can be just what the credit doctor ordered in terms of getting your financial house in order. Here's what you need to know about making a credit card balance transfer.
Balance Transfers and Credit Utilization
"If you have a card that's maxed out and a second card with utilization that is next to nothing, you will likely see credit score gains if you transfer some of that high balance onto the low balance card," says Randy Padawer, a consumer advocate with LexingtonLaw. Indeed, credit utilization is one of the biggest factors when it comes to determining your credit score. However, unlike the other biggie, timely payments, you can make a big impact on your credit utilization in a short period of time. In fact, the next time your credit card reports your credit utilization ratio, you're likely to see an adjustment.
It's important to keep one thing in mind with regard to your credit utilization when thinking about a balance transfer. Credit utilization is a function of both your utilization in total and on each and every card. In other words, the ideal is to be using less than 30% of your total available credit at any given time and to be using less than 30% of your limit on every card. If you're going to do a balance transfer, you won't be impacting your overall utilization, but you will be able to move the money around from one high-balance card to something with a lower balance.
Will a Balance Transfer Impact Your Overall Score
Oftentimes people want to know if their credit score will be impacted by making a balance transfer. However, Mike Sullivan, director of education with Take Charge America, points out that your credit score is essentially just a mathematical interpretation of your credit report. "If all you've done is move your balance from one card to another, you've done very little," he says. You might have an overlap, where the old card and the new card are reporting high balancing at the same time. This might ding your credit in the short term, but once the correct balances get reported, your credit score will get corrected.
Another area where a balance transfer might impact your credit, according to Sullivan, is opening a new account. "It doesn't last long," he says, "as long as your payments are on time and you're not increasing your overall utilization." Indeed, if you're lowering your utilization, either by getting a new card or by moving your money around, the overall effect of a balance transfer might be to improve your credit score. "Having more cards and more accounts is useful up to a point," Sullivan says. Having four accounts instead of three is more likely to have more of a positive impact.
Balance Transfer for a Lower APR
"You can lower your overall APR burden by moving from one card to another," says Padawer. He urges consumers to watch their mailbox for balance transfer checks if they feel like they're paying too much in APR. "You might find yourself having very low interest or even zero interest for substantially long periods of time," he says.
The low interest rate, when coupled with the immediate impact utilization has on your overall credit score, means that it might behoove you to temporarily take a hit on your credit in favor of lower APRs. "If you balance transfer to a card that will subsequently max out, you're effectively trading FICO points for a lower APR," Padawer says. "That may be O.K. If you don't plan on qualifying for new credit until you get your utilization back down, it won't make much of a difference." That's the choice you might have to make. But again, once you pay down your utilization, your score will go back up again. So which is more worth it to you: having a high credit score or a low APR?
One last thing to consider is the balance fee transfer. Sullivan notes that 3% of a $10,000 balance is $300. "If your interest rate is dropping considerably and you're going to save $10 a month for 36 months, you're going to save money," he says. You just have to do the math.
--Written by Nicholas Pell for MainStreet