Balance transfers sometimes get a bad reputation in the personal finance community. People are hesitant to open up a new credit card, which could be understandable if their gun-shy nature were linked to their current debt. Unfortunately, many people back away from balance transfers – and saving hundreds to thousands of dollars – because applying for a new credit card will cause a drop in their credit scores.
We’re here to tell you a secret: it’s worth the drop.
How much will my score go down?
According to FICO, your score is calculated based on:
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- New credit – 10%
- Types of credit used – 10%
When you apply for new credit, which accounts for 10 percent of your score, there is a hard inquiry on your credit report. Lenders use your report and score to determine your reliability as a borrower.
Read what makes a 700+ credit score
FICO states, “In general, credit inquiries have a small impact on one’s FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score.”
There are other factors, including how often you’ve applied for credit. If you haven’t opened a new line of credit in months or even years, then there should be no reason for your score to drop more than a handful of points.
The average credit card debt in America is $10,000. A balance transfer to a 0% interest rate could save the average American $3,675.
If you’re refusing to switching to a 0% interest rate, because your score would drop five points, that means you’re valuing each point at $735. A single point on your credit score is simply not worth $735.
How long until my credit score goes back up?
It generally only takes a few months for your score to go back up. In that time, you’ll need to demonstrate responsible use of your credit and not be incurring more hard inquires on your reports.
Your new line of credit will also increase your overall credit limit, which will help drive down your utilization ratio.
Utilization is the amount of your credit limit you use. If you’re credit limit is $4000 and you spend $800, then you are using utilizing 20% of your total credit limit.
The ideal utilization ratio is 30% or less, so the higher your credit limit the easier it is to keep your utilization rate low.
Who should be worried about a dip in a credit score?
If you’re planning to apply for a mortgage or loan to make a large purchase, then you want your credit score as high as possible. The higher your credit score, the lower your interest rates will be on your loan.
It is best to hold off on a balance transfer or any hard inquires on your credit report, until after you’ve secured a mortgage.
Don’t let your credit score just be a trophy
A credit score of 680 and above is something to be celebrated – celebrated by getting the best possible interest rates and using a strong score to your advantage.
Don’t let your credit score just sit on your mantle like a trophy. You should be wielding it as a weapon against outrageous interest rates that make it hard to pay off debt.
A high credit score gives you power. Use that power to save yourself hundreds to thousands of dollars.
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