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One of the most beneficial things we did during the debt elimination phase of our financial journey was transferring all of our outstanding credit card balances to one card that was offering 0% interest on balance transfers. With outstanding credit card balances totaling over $20,000 at an average 11% interest rate, this simple move saved us over $180 a month in interest alone.
Following this strategy may work well for you, just remember that there are a couple of things you need to consider before you take advantage of special balance transfer offers.
Balance Transfer Fees: Don’t let credit card companies lure you in with low interest rates on balance transfers only to hit you with a 5% balance transfer fee. This is a common tactic and the reason it is so important to read the fine print of any balance transfer offers.
Your Credit Score: If you transfer balances from several cards on to one, you need to be aware of the implications this may have on your credit score.
A big factor in the calculation of your credit score is your credit card utilization rate. Your credit card utilization rate can be defined as the combined balance of all your credit cards in relation to the combined limit of all your credit cards.
Generally speaking, the lower your credit card utilization rate, the higher your credit score will be. Consider the following:
If you have 4 credit cards with a combined spending limit of $10,000, and the combined outstanding balance on these 4 credit cards is $3,500, your utilization rate is 35% ($3,500 / $10,000 = 35%).
If you decide to consolidate all of these balances to one credit card that has a limit of $5,000, and you decide to close the other 3 credit accounts, your utilization rate jumps to a FICO Score killing 70% ($3,500 / $5,000 = 70%).
For the sake of your credit score, you may want to leave your other credit card accounts open at least until you pay off the outstanding balance.
The responsible use of credit cards can compliment any sound financial plan. If you are not ready to give up on them entirely, be sure to read my tips on the responsible use of credit cards.
