How a Credit Card Balance Transfer Can Improve Your Credit Score

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Right before and after the holidays you’ll probably get a lot of bank offers to transfer credit-card balances from one account to another. If you see balance transfers as an opportunity to go on a shopping spree, chances are you haven’t quite learned how to manage credit and debt wisely, and that balance transfer deal is simply going to lead you into financial trouble.

But does that mean that balance transfers are always bad ideas for everyone? Absolutely not.

In fact, many people can use a balance transfer strategically, to save money and to boost their credit rating.

Let me explain how.

To raise your credit scores, it’s always best to pay down debt, as opposed to shifting it around. However, for most people trying to boost their credit rating, it’s not always possible to instantly pay off all their credit card debt.

So what can you do in that case? You can shift debt around – or increase your available credit – in order to strategically lower your credit card utilization rate.

A big chunk of your FICO credit score – 30%, to be exact – is based on the amount of credit card debt you’re carrying vs. your overall credit card limits. This ratio is known as your “credit utilization rate.”

For example, let’s say your creditors have extended to you a total of $15,000 in available credit on all your cards. If you’ve charged $10,000 on those cards, you’ve used up two-thirds of your available credit and your credit utilization rate is 67% – not good.

What is the “Ideal” Credit Utilization Rate?

To increase your credit scores, it’s imperative that you slash your credit utilization ratios. No one knows the precise magic number when it comes to credit utilization rates; FICO doesn’t reveal the exact “ideal” credit utilization rate.

However, we do know that higher credit utilization rates generally translate into lower FICO scores. And statistically speaking, those with lower credit utilization rates have higher FICO scores.

Therefore, conventional wisdom is that it’s best to keep your credit utilization rates at a maximum of 25% or so for a higher FICO score. (If you haven’t seen your FICO score lately, read this article on how to get your FICO score free).

Continue reading Lynnette’s article, How a Credit Card Balance Transfer Can Improve Your Credit Score on WalletPop

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