Financial Mishaps: Paying off Credit Cards with Credit Cards

So you got an offer for a 12 month, 0% APR credit card in the mail. It may be tempting to pay off your 14.9% APR Discover Card with this new offer credit card. Really, who wouldn’t consider jumping at 0%? Well, before you jump in, you may want to consider a few things first. Let’s take a look at how using a special offer credit card to pay off an established card can actually hurt more than you might think.

Hidden Fees

You know all that fine print at the bottom of your credit card offer? Yep, it’s often hiding something, usually in the form of balance transfer fees or a jump in percentage rate after the initial teaser APR expires (like that 0% for a year teaser rate in our example). Let’s look at each of these.

Balance transfer fees differ by company, but they are often around 3% of the total balance you are transferring. So if you have $10,000 on your card, $300 will be tacked onto the new credit card right away. Ouch. Some companies do offer a fee cap, though (which stops the fee from going above, say, $100), so you might want to check this out.

The APR jump can also vary quite a bit, but it could leap from that 0% to 20% at that one year mark. Double ouch. It may be advisable to check out the new APR after the initial teaser rate, before you sign on the dotted line.

Credit Score Hit

Whenever you open a new credit card, you are subject to a credit score hit. For those whose credit score is the magical 800 to 850 range, that hit may be minimal. But if your score hovers below 750, transferring a balance could take you below the optimal level for future purchases, like a house or a car.

If that doesn’t make much sense, let’s look a little closer. Your credit score is based on this huge collaboration of numbers, and the FICO boils all of these down to a few simple parameters: number of cards and other debts, length of time open, number of times late on payment, and credit to debt ratio.

This last one, the credit to debt ratio, may be the biggest consideration for you as you think about transferring a balance. If you transfer your entire balance to a smaller credit limit, your credit rating could suffer.

For example, if your Discover Card (the card you are paying off) has a credit limit of $20,000 and your balance is only $10,000, paying off with a new credit card of $10,000 will look bad to the credit powers that be. Basically, your credit to debt ratio jumped from 50% to 100%; this makes it look like you don’t have any credit available to fall back on in lean times. Or like you don’t know how to pay more than the minimum payment in order to decrease your debts. Triple ouch.

What then should you do if presented with a wolf in sheep’s clothes? You could walk away, or you could take a look at that credit card offer with a fine-toothed comb. Sometimes transferring a balance is an excellent idea: if your credit score is great; if you don’t plan to purchase anything big soon; if you can negotiate a free balance transfer fee or a cap; and if the new interest rate (after the teaser rate) is acceptable. So check it out before you sign!

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