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Updated on Monday, June 30, 2014
You applied for a balance transfer credit card, and you were rejected. Now what?
First: do not beat yourself up. I spent about six years of my banking career in risk management. That meant I decided the rules for who to accept and who to reject and I can confirm that we always got it wrong. If you are interested, you can learn more here.
But, if you are just focused on saving money, then keep reading. Before applying for a balance transfer credit card, you need to ask yourself three questions:
- What is my credit score?
- How many times am I willing to be rejected?
- Which banks can I apply to?
You should not fear getting rejected for a balance transfer. In fact, you should expect it – bank rules are complex and do not always make sense. Once you have a plan, then you can take action, and the fear of rejection will not hold you back.
1. What is my credit score?
Knowing your credit score is an important first step in understanding your chance of being accepted. There are a lot of credit scores out there, and they just form part of the bank’s decision-making process. However, they form an important part, because they give you a good indication of your odds of being accepted.
FICO is the original credit score. If you have a Discover card or Barclays, then you can get your FICO score for free each month on your statement. You can also visit their website to see your score online.
If you don’t have a Discover card or Barclays, then you can get your score online for free by using a variety of tools. For example, at www.creditsesame.com you can see your Experian credit score for free once a month.
Remember: when making a decision, credit card companies have their own proprietary scores. They have teams of statisticians who build their own scores and set rules. I used to run teams like these. But all scores tend to look at the same thing, so knowing one of them is enough to give you a good indication of your odds.
Having a good credit score is remarkably simple. You do not need to be rich to have a good credit score. You just need to do the following three things:
- Pay your bill on time, every month.
- Do not max out your credit cards.
- Repeat 1 and 2
It really is that simple.
If your score is above 680, then you have a good chance of being accepted for a balance transfer. If your score is above 750, then it is highly unlikely that you will be rejected.
But banks do use policy rules in addition to the score to make a decision. These rules are different depending upon the bank. The rules tend to focus on two big areas:
1. Debt burden: Banks want to make sure that you can afford your monthly payment. They will set a maximum debt burden. How it is calculated and the level can vary depending upon the bank.
2. Total debt: Even if you can afford the monthly payments, banks do start to get nervous when your total credit card debt gets too high.That number may vary. It can be an absolute amount, or it could be an amount relative to your income. Again, these rules vary by bank
So – even if you have a 770 credit score – you could be rejected by one bank (who thinks you have too much credit card debt), but approved by another (who thinks you are a safe credit risk).
And banks may set tougher rules the lower your score. So, if you have a 690 score, the debt burden requirements may be stricter than if you have a 770 score.
Bottom line: If your score is above 680, you have a good chance of being approved by someone. The higher your score, the better your chance.
2. How many times am I willing to be rejected?
Once you decide that you want to apply for a balance transfer, you should decide how many times you are willing to be rejected.
Every application for a new credit card takes between 5-10 points off your credit score. In six to 12 months (assuming you continue to pay on time and your credit card balances continue to go down), then your score will recover.
If you plan on applying for a mortgage or auto loan in the next six months, you should not apply for any new credit. You should protect your score.
But, if you do not plan on applying for a mortgage or auto loan in the next six to 12 months, then you should feel very comfortable making multiple applications.
The higher your score, the more confident you should feel with multiple applications.
If you have a score between 680 – 720, then you should feel comfortable applying up to three times. Assuming all three banks reject you, you will have lost approximately 30 points. So long as you continue to pay on time, you will get those points back over the following year.
If your score is above 720, then you should feel comfortable applying up to four times.
Why not five or six? If you apply to four different banks, and each one of them rejects you, then your odds of being approved are very low. Either your debt burden, your total debt, or demons from the past (like collection accounts or judgments) may be holding you back.
One last tip: after two applications, consider applying for a loan at www.lendingclub.com. You can see if you will be approved without having a credit inquiry. But they do not like people with four or more credit inquiries on their file. So, if you like the personal loan offer at a lower rate, then you can continue before finishing the other one to two credit card applications.
Bottom line: Based upon your starting score, you should decide how many times you are willing to be rejected. Then you can apply multiple times without panicking.
3. Which banks can I apply to?
Remember: balance transfers only work if you are shifting debt from one bank to another bank. So, if your debt is on a Citibank credit card, you can not transfer it to another Citibank card – you would need to look at other lenders.
So, when you make your balance transfer plan, make sure you only apply to a bank that is different from where you have your existing debt sitting.
Different banks have different lending criteria. So, applying to a few banks increase your odds of being accepted by someone. PenFed, for example, has very strict rules. Barclays is known to be less strict. So, applying to a range of credit card companies can help increase your odds of acceptance.
Bottom line: Every bank builds its own custom score. And they also set their own rules. The more banks you apply to, the higher the odds of being accepted by one of them.
Before applying for a balance transfer, you should set your plan. You should set a limit on the number of times that you are willing to be rejected. Then you can choose the best offers from banks (so long as your debt is not already with those banks).
Apply with confidence. Hopefully one of the banks will approve you.
If you are rejected by all of the banks, then just keep paying on time every month, and continue to reduce your total debt. You can try again in six to 12 months. The more on-time payments you make (and the lower your credit card debt), the better the chance that you will be accepted and can take years off your debt with a lower interest rate.