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Friday, August 7, 2020   
 

Problems with balance transfers
by Scott Bilker
Scott Bilker is the author of the best-selling books, Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart. He's also the founder of DebtSmart.com. More about and DebtSmart can be found in the online media kit.
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Scott Bilker

Hi Scott,

I have gone through the trouble the past few months to get a permanent, lower-interest credit card and also to get a promotional rate on the new card to transfer balances ($5,000 to $12,000). I go through the whole process and get approved for $1,000. I cancel the card immediately, because it's just not worth it. I canceled a card with $29,000 credit earlier in the year because I didn't want to support the company.

What might be the problem?

Seth

The problem may be that your credit score is not high enough to get the new lines of credit you need in order to transfer all your balances. Ironically, by cancelling your $29,000 credit card you may have reduced your credit score (FICO).

If you close your accounts, you may be closing your options.

Your credit score is based on many components--most importantly, the timeliness of payment on debt. After that, other components include: type of credit, amount owed, length of credit history, and how much debt you have relative to your available credit.

It's those last two items that may hurt your score by cancelling your credit cards. What I suggest is not closing the account, but simply using it infrequently. I use each credit card that I have for at least two weeks during the year. This way the bank doesn’t close the account for inactivity, and I benefit from having many cards with long histories.

Additionally, your best low-rate offers will arrive by mail on your existing accounts. Hold on to the card, and don’t use it for a while. Once that bank realizes that they’re not making money from you, they will send an enticing low-rate offer hoping to hook you in until they can raise the rate. Once that happens, and you take advantage of the low-rate, all you need to do is be DebtSmart by watching the calendar, being careful to transfer your balance to another low-rate offer before the first bank has a chance to raise their rate once the promotional deal ends.

The other problem with closing your account is that the debt-to-available-credit ratio will increase. For example, say you have two credit cards, each with a $5,000 credit limit and one has a $5,000 balance. As it stands, you have a debt-to-available-credit ratio of 50% because you owe $5,000 on a total of $10,000 in available credit. If you closed the 0-balance card, you would owe $5,000 on a total of $5,000 in available credit, which is a 100% debt-to-available-credit ratio. In other words, you’re totally maxed out. Banks like to see this ratio at about 30 percent, so it’s in your best interest (no pun intended) to keep that number low. Simply getting new lines of credit will bring that down and possibly increase your score. You can find out more about your credit score, and how to get it, by visiting http://www.debtsmart.com/score

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