The Balance-Transfer Game
Everybody loves a good deal. In the credit card world, there are good deals and bad deals. The best deals will involve a really low interest rate on any balance you're carrying. There are other less-important factors as well. For example, it's nice to avoid paying annual fees, earn some type of reward, and have flexibility and protection features in your credit card. However, the rate is what is most important.
When you have decent credit or better, you'll have a lot of folks banging on your door to offer you their version of a great deal. Often, you get solicitations to transfer your existing credit card balances to a new card in order to enjoy a lower interest rate on those balances. Another tactic is to offer you a low interest rate on new purchases going forward, so everything you buy has low or no interest applied to it. Sometimes the credit card companies will offer you a low rate on existing balances and future purchases at the same time. While these offers are tempting, they probably won't help your credit.
Knocking Down the Score
Each time you apply for one of these low-interest accounts, your credit score suffers. First, the lender may add an inquiry to your credit report, meaning they're taking another hard look at your credit history to see what type of risk you are. Yes, they say you are preapproved, but they will do some additional homework to decide how much to lend you.
Applying for new credit cards adds trade lines to your credit report. One or two balance transfers as you eliminate your debt won't ruin you. However, if you make a habit out of transferring balances as the introductory rate expires, you'll end up with lots and lots of accounts after a while. You'll also have a high number of inquiries.
If you've got too many accounts out there, lenders worry that you might decide to use those accounts to rack up more debt than you can handle. Will closing the accounts after you're done taking advantage of the offer help? Perhaps. If you just close your accounts, you're taking two risks. First, if you just transfer balances and then close accounts, you'll never end up with long-lived credit accounts in good standing. Lenders like to see evidence of a relationship that has worked well, and you won't have that. In addition, closing an account that you just transferred elsewhere will result in your credit-utilization ratio going up. In other words, you'll appear as if you're using a greater percentage of your available credit, which doesn't help you.
Is It Really a Solution?
Does the balance-transfer game really do anything to help you? While it can reduce your borrowing costs temporarily, it's not a long-term solution. You don't reduce your total debt, you just shift it elsewhere. Granted, you may make some payments and reduce the debt a little. However, unless you have a plan to completely knock that debt out, it will always be there. If you have such a plan, how much will you really save by playing the balance-transfer game?
Finally, your debts may be a sign that you need to change your behavior. If you're simply changing accounts and keeping the debt, it means that you're either spending too much or making too little. Figure out a solution to your budget issues, and the debt will take care of itself.
