Will Using 0% Balance Transfer Credit Cards Lower Credit Score?

By: Aubrey Clark

We are asked this question on a regular basis and the short answer is yes, it probably will. The caveat is how much will it hurt the scores, for how long and is there anything I can do to keep my credit score from dropping? Some times the benefits out-weigh the credit score dip that should be measured by each card holder as it applies to their specific situation. There are also some tips and tricks that could significantly help you when you applying for a balance transfer credit card, or any card for that matter.

First a disclaimer, the credit score formulas that are used by the three credit repositories differ by each company and are as closely guarded as Fort Knox. It is virtually impossible for anyone to give exact information concerning credit scores however, a very close generalization is possible.The information I am sharing in this article is based on my observations and experiences obtained in my fifteen years of working in the mortgage and financial markets. I believe this information to be true and factual at the time of this writing but do not warranty or guarantee it's accuracy. Sorry, about the legal stuff, now let's get cracking.

The credit score dip from applying for a credit card is estimated to be from 1% to 10% from your normal score depending on different credit factors on your report. If we assume a 720 credit score this means your score could be derogated by as little as 7 points and as much as 72 points, again these are estimates. I have noticed that those that are affected the most tend to be people that have an abundance of credit cards already with high balances. Roughly 30% of your credit score is derived from credit to balance ratios. Meaning if you have a $5000 credit limit and a $4900 balance you are considered to be a higher risk.

The optimum credit to balance is 30% - 50% depending on the repository that rates you. This means having a $1500 balance on a credit card that has a $5000 balance will have a positive effect on your credit score and a $4900 balance will have a negative effect. I have seen borrowers actually open a new credit card account simply for the purpose of lowering this ratio and raising their credit scores, and it worked. In fact it worked so well that they qualified for an entirely different mortgage that saved them over a $175 each month! If you are working on or considering to take out a mortgage please consult your loan officer before making this move.

If you make a balance transfer in hopes of raising your score and it doesn't work the ramifications could be catastrophic at worse and problematic at best. Mortgage companies, especially in today's mortgage climate, are weighing the borrower's over-all credit management and debt to income ratios very closely. Transferring one credit card balance to another card to lower your interest rate is definitely a smart financial move but may have unintended consequences. The risk is that many balance transfer cards actually have a higher minimum payment than some higher interest credit cards and this could raise your debt to income ratio and cost you a loan. Be sure to look into the new minimum payments before you transfer your credit card balance.

One way to off-set the credit score dip is to opt-out of credit card and loan solicitations online, I have seen this move raise my borrowers scores as much as 10 points. Quite honestly, I don't know why this works but I know that it does work. I suppose that it lowers the amount of "soft inquires" you bureau receives and lowers your over-all risk factor. The irony is that it is the credit card companies that sell the information to mortgage companies and credit card companies that causes the lower score, go figure. Anyway, you can find the website to opt-out here, it's free and safe.

Another thing that lower your score is when transferring a balance to a new card it is exactly that, a new card. A large part of the credit scoring process is the length of time on the accounts you have open. Once you open new account the credit bureau doesn't have a way to know how or if you will be able to handle the new debt so they "ding" for that. However, leaving your old credit card open having a zero balance is regarded as a positive on your credit score because it shows restraint and assumedly a good payment history. I suggest you keep the old account open but shred the card. If you are like most people, Ahem, that open credit card could easily transform itself into a Disney family vacation.

In closing, the reasoning behind "dinging" someone's credit score is asinine on the surface but it really makes sense if you think about the big picture. If credit card companies didn't "ding" your credit each time it is pulled there wouldn't be a way to stop prevent criminals or dishonest people from applying for 100 credit cards at once to receive hundred's of thousands worth of credit with no intention of paying it back. Unfortunately it does have a slightly negative effect on regular people but keeps credit card companies from having to raise their prices due to rampant fraud, so they say.

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