It’s hard to argue against the appeal of zero interest credit cards for balance transfers. You just transfer your credit balance from a high-interest card and boom: free money!
But not so fast. A 0% APR credit card offer can hold great appeal, but if you’re not careful, the process could actually hurt your FICO credit score and leave you with greater debt than before. Here’s how:
It could increase your credit utilization
To understand how a no interest credit card may hurt your credit, you need to understand how your FICO score works. The top factor is your on-time payment history, worth 35% of your score. The next most important factor is your credit utilization, worth 30% of your score. Here’s where a transfer of a balance from a high-interest card to a no-interest card can hurt.
FICO looks at your ratio of debt to available credit. Add up all the credit limits of all your cards and subtract the amount of credit used; that’s your credit utilization ratio. If you’re using 30% or less of your total available credit, that’s good (10% or less is even better for your credit rating).
So if you move a $5,000 balance from a high-interest credit card with a $20,000 limit to a no interest card with a $10,000 limit, your credit utilization will double from 25% to 50%.
Nerd note: When you transfer a balance to a new card, don’t close the old account. Keep it active, even if it goes unused. That keeps your credit utilization lower and length of your credit history (worth 15% of your FICO score) higher.
A new credit card will hurt your credit
Bad news: Evaluation by the issuer of the new card includes a “hard inquiry” of your credit history, which signals you’re looking to take on new debt. The number of new inquiries into your credit history affects about 10% of your FICO score.
Good news: Over time, a new card can help your credit score by diversifying your credit line. It’s also helpful if you keep your balances low and always — always — pay your bills on time.
Check beyond the teaser rate
Remember a zero interest card is a promotional offer. That means it ends, usually between six months and 15 months later. Then interest rates, often in the double digits, kick back in again. Is the new rate lower than your old rate? Will you reasonably be able to pay down your balance before the higher interest rate begins?
0% on purchases is still more debt
OK, so you don’t pay any interest for a limited time on new purchases. But you are still taking on new debt. Zero percent offers are great as tools to help in the short run, whether to temporarily cover a purchase or help double-down on paying off a high balance.
If your spendthrift ways got you into debt troubles in the first place, then a zero interest card can be an avenue for even more damage. Handle with care.
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