Many readers of this site have written to us to express concerns about the potential impact to their credit score when applying for a card with 0% promotional balance transfer offer. Their concern is completely understandable. Your credit score is one of your most valuable assets, and you should consider its protection to be a primary consideration.
On the other hand, it cannot be the only consideration when making a financial decision. Here are three ways in which people waste money on interest charges just to temporarily save a few points on their credit scores.
1. Overvaluing your credit. Your credit score is important, but only to a certain extent. For example, having excellent credit will help you to qualify for good rates on a home or car loan. But what is excellent credit? It is generally defined as a score above 750. But what is interesting is you can’t have credit that is better than excellent. This is to say that a credit score of 790 is just as good as 800. And if you aren’t about to apply for a major loan, a temporary drop of a few points on your credit score is meaningless.
2. Overestimating the impact of a new credit card. When cardholders apply for a new credit card with a promotional 0% APR balance transfer, several things occur. First, there is a credit inquiry. A single credit inquiry has a negligible effect on your credit score, while several in a short period can lead to a small, but temporary decrease in your score. At the same time, opening a new account will increase your available credit which will reduce your debt to credit ratio (for a given level of debt). And of course, having a reprieve from interest payments should allow you to reduce your debt levels more quickly than otherwise. So the impact of applying for a single new card may even be positive.
3. Underestimating the value of a promotional balance transfer. Not transferring a balance of $1,000 just to protect your credit score would cost close to $150 a year on a card with a 15% APR. In another scenario, $5,000 of debt at the same rate would cost $750 in interest expense over one year. And the figures are greater when the promotional period is longer or your level of debt is higher. So unless you are about to apply for a major new loan, it is unlikely that even a small drop in your credit score will be even remotely close to the added expense of making these interest payment
By understanding exactly how your credit score works, and what the effect on it is when you open a new account, you can ensure that you do not waste hundreds of dollars on interest payments in a misguided attempt to preserve your credit score.
For additional information or to learn more about credit cards that offer 0% APR balance transfers, please see the credit card comparison section of Smart Balance Transfers.