If you’ve taken a company up on a zero-interest credit card offer, you might be hoping to pay off debt and improve your credit score. In theory, this is a good idea. Not having to pay interest can help you attack your principal more aggressively.
However, simply performing a balance transfer won’t help your credit. And zero-interest credit cards can create some speed bumps on the way to your new, improved FICO score. If you’re still hoping to improve your credit with a balance transfer, look out for these dangers.
Getting a new card puts a credit inquiry on your credit report, which negatively affects your score for about a year. This will be a small dip compared with the score bump you’ll get when you pay off debt, but it can be a factor if you’re lowering your debt in order to apply for a mortgage or other loan. So, you may want to avoid applying for other credit cards in quick succession.
Credit utilization rate
The amount of available credit that you’re currently using is called your credit utilization rate, and it influences 30% of your credit score. Scoring agencies like it when you have a lot of credit available but use relatively little of it. Balance transfers can cause problems with this aspect of your score, whether you’re transferring several balances to one card, or one balance to a card with a lower limit.
If you’re paying off a single credit card, try to find a zero-interest card with the same limit, or higher. Impossible? Your score will nevertheless improve as you pay down debt.
Credit repair strategies work only if you’re not racking up new debt while paying off the old. It’s also important to pay all your other bills on time. Because scoring agencies increasingly look at factors aside from your credit history in determining your score — including utility payments — it does little good to aggressively pay off cards at the expense of other obligations.
The bottom line
It’s certainly possible to use a zero-interest credit card as one part of your FICO-score-boosting strategy — but should you? If you don’t get the transferred balance paid off before the no-interest introductory period ends, you could end up saddled with sky-high interest rates again. Ask a licensed credit counselor for other credit repair methods.
For some people, a balance transfer is the best way to pay down debt. If this is true for you, create a strict budget for your payments — and don’t close old accounts once you’ve paid them off. Leaving them open will showcase the length of your credit history and help your credit utilization rate.
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