Editorial Policy

Planning a Back-to-School Balance Transfer

Eva Norlyk Smith Ph.D.

September 4, 2012

QHi Eva,

I’m about to start grad school, and I need a new laptop that costs $2,000, but I have $500 in the bank. My credit card has a 15 percent APR with a $5,000 credit line. I was thinking of putting the laptop on my card and then doing a balance transfer to a card that doesn’t charge interest. I see that some don’t charge interest for 15 months, and I could definitely pay off my laptop by then. But is a balance transfer card with that long of a no-interest period something you have to have really good credit for? I rarely use my current credit card and have no other credit cards, nor credit card debt. My FICO score is 680. Assuming I get approved for the new balance transfer card, are there any things I should watch out for? I really don’t want to pay interest on the laptop if possible. — Makayla

ADear Makayla,

It’s true that your credit score doesn’t fall into the “excellent credit” category, which is reserved for those with FICO scores 720 and above. However, 680 is still considered a good score. You should be able to find a balance transfer card that works for you without too much trouble.Ask Eva

Plus, once you apply for a balance transfer card and begin to use credit more actively, your credit score is likely to get a considerable boost. Since you have no credit card debt, your FICO score presumably is relatively low for several, easily remediable, reasons. First, you have only one credit card, which you don’t use very much. Second, since you are just starting grad school, I presume that you haven’t had the credit card you do have for that long.

All of this means that you have what is referred to as a “thin” credit file. Your credit report doesn’t contain that much information about how you use credit, and that is keeping your credit score artificially low. So, once you get another credit card and begin to make regular payments on the balance each month, you are likely to see a great improvement in your FICO score.

However, if you don’t go about the balance transfer in the right way, it could hurt your credit. Here are the steps to get the most out of the balance transfer, so you will both save on credit card interest and increase your credit score. The latter is, in my opinion, just as important for you as taking out the 0 percent APR balance transfer.

1. Find the right balance transfer credit card. Avoid applying for balance transfer cards that require excellent credit. Applying for a balance transfer card for people with good credit will make it much more likely that you will be accepted.

2. Calculate how much you can transfer. Because your credit score is less than excellent, you may find that the card issuer will give you a fairly low credit line on the new card. This is where balance transfers can get tricky. Even if you get a balance transfer card with a $2,000 credit line, it probably wouldn’t be a smart idea to transfer the full balance from the computer purchase onto your new card.

Why? Because it will affect an important component of credit scores called credit utilization. This is a measure of how much of the available credit you are using, and it accounts for a full 30 percent of FICO scores.

Credit utilization is calculated both within and between cards. So, for example, if you get a card with a $2,000 credit line and transfer the entire cost of the laptop, the between-card utilization will be $2,000  out of a total credit limit of $7,000 (the new card’s limit, plus the old one’s) —  that’s around 28 percent. However, for the new card with the $2,000 credit limit, you would be using all of the card’s credit limit. That’s not healthy. To maximize your FICO scores, financial experts recommend keeping credit utilization below 30 percent, and ideally as low as 10 percent.

If you end up with a low credit limit on the balance transfer card and want to play it safe, consider using that money you have in the bank to lower the amount you have to transfer. You could also transfer less than planned (maybe up to 40 percent to 50 percent of the credit limit), or apply for another balance transfer card to spread out the amount transferred and avoid overloading just one card.

Since you will be paying off the debt within 15 months, the credit utilization will go down quickly, so any ding on your FICO score caused by the high utilization will be temporary (and, to a degree, counterweighed by the other positive changes on your credit report). Still, credit utilization is an important factor to consider.

3. Calculate the balance transfer fee. You’ll be somewhat disappointed to learn that the savings with the balance transfer aren’t as high as you might expect. Most balance transfers come with at least a 3 percent fee. For a $1,500 balance transfer, that means that you will be paying $60 right up front, just in balance transfer fees.

How much do you save in interest charges by doing the balance transfer? Well, because you will be paying off the balance fairly quickly, the interest charges actually wouldn’t be too prohibitive. You can use this credit card calculator to play with different scenarios. For example, with a typical credit card, if you were to pay down the balance over 15 months at $115 per month, the total interest charges would be $147.82. So the savings for the balance transfer, after subtracting the $60 balance transfer fee, is about $87. Not shabby, but not something to bring out the champagne for either.

Still, even though the savings might not be as high as you expected, using a balance transfer to pay for your computer is a smart money move for you. Since you are still building your credit record, opening another credit card and paying down a balance with timely monthly payments should easily help your FICO score move from good to excellent. And, if you save a cool $100 in the process, all the better.

Got a question for Eva? Send her an email.