The Do's and Don'ts of Credit Card Balance Transfers
Whether or not you should accept a balance transfer deal depends on many factors, including the fine print of the balance transfer agreement and whether or not you can successfully use the balance transfer to better manage your overall debt.
Shifting debt from one credit card to another is more art than science, but done properly, it can save you lots of money -- particularly if you're taking debt from one high interest rate card and putting it on another, lower interest rate card. Balance transfers can also help you improve your credit score.
To guide your decision-making process, here are some dos and don'ts to consider when you're thinking of doing a credit card balance transfer.
Do Look at the Entire Deal
When people do balance transfers, too often, they only look at the interest rates of the credit cards involved. But it's really wise to look at the overall deal you're getting.
Is there a fee involved to do the transfer? If so, how much is it? Does your old or new card have an annual fee? What terms apply to each card? What credit limits will be imposed on each card?
You should weigh all these factors in your decision-making, and do the math to make sure a balance transfer makes good economic sense.
Do Get Online
Comparison shop online to make sure you're getting a good deal. Consumer-friendly websites, such as CardRatings.com, will help you comparison shop, which can save you time and money when you're trying to find a card that best fits your needs.
For instance, CardRatings.com allows you to search for cards in multiple categories, such as:
- Low interest
- Cash back
- Low intro rate
- Balance transfer
- Gas rewards
- Credit card deals
- Student credit cards
- Business credit cards
If you're interested in a specific card – say, the Capital One Venture Rewards Card or the Slate Card from Chase – it's also worth hopping on the issuing bank's website to find out all the details, features and conditions associated with obtaining the card or doing a balance transfer.
Don't Apply for Too Many Cards at Once
I don't recommend applying for a slew of new credit card accounts, even if you get multiple offers with very low interest rates. Opening up too many accounts at once can actually hurt your credit score for two reasons.
For starters, the length of your credit history is one factor (approximately 15%) in determining your FICO credit score. The FICO scoring model analyzes the "average age" of all your credit accounts and also evaluates the time since various accounts were opened. Generally speaking, the longer you've been managing credit, the more positively that influences your score. So if you open several new accounts, the average age of your accounts will decrease, possibly lowering your score.
Additionally, you don't want to have too many inquiries on your credit report. When you apply for credit, a "hard" inquiry is generated. By some estimates, just one inquiry can lower your credit score by up to 35 points.
Although this hard inquiry stays on your credit report for two years, the good news is that a hard inquiry only counts against you for the first 12 months. After one year, that inquiry isn't taken into consideration any longer when your FICO score is calculated.
When you check your own credit report, a "soft" inquiry is generated. Soft inquiries have no impact on your credit rating and don't hurt your score. (Read more about how inquiries in your credit report affect your credit score.)
Don't Close Your Old Accounts Immediately
Some people mistakenly believe that getting rid of their credit cards will improve their credit. So they immediately close certain accounts once they pay them off, or when they complete a balance transfer. But doing so is a mistake that could hurt your credit score in two ways.
First, if you cancel existing accounts, you don't get the full benefit of having those older accounts get counted in the "average age" of your accounts. And remember, a longer credit history is viewed more favorably.
Also, if you close a credit card account, especially one that now has a zero balance after you've done a balance transfer, you can inadvertently impact your credit utilization rate. With less credit available, your credit usage ratio will increase, lowering your credit score.
So even if you do a balance transfer, it's generally best to keep open an older account that has a long credit history. If for some reason you simply don't want the card any more – perhaps it has a high annual fee – just keep the account open for a while after you complete the balance transfer. Later, after you've had the new credit card account for a year or so, you can close it.