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A Money Talks News reader asks…
I have a huge concern: My husband and I have pretty good credit: (credit scores) above 750. I decided to apply for (low interest) credit cards that I could transfer balances to and pay off a family vacation. My concern is that I applied to two cards based on the low APR, and unfortunately, realized too late that the transfer fee was too high for me. I am very concerned that I applied for the wrong cards.
Does it lower my credit score to cancel these cards and then apply for cards that offer what I really need, which is a lower transfer fee? I hope you can help me figure this out. Thank you very much for your help.
Thanks for the question, Sandra. Here’s your answer…
Unfortunately, you realized a bit too late the first of our 5 Questions to Ask About Zero-Percent Card Offers: “What’s the balance transfer fee?”
Nevertheless, since you and your husband have excellent credit, you should still be able to receive some good balance transfer offers. Currently the best balance transfer card on the market is the Slate Card from Chase. Unlike most other cards, it offers balance transfers with no balance transfer fee and features a zero percent interest rate for 15 months on both purchases and balance transfers.
And here’s some even better news: For most people, having additional credit cards can improve their credit score. That’s because of what’s known as a credit utilization ratio.
Your utilization ratio is the amount of debt you have outstanding compared to your available credit. For example, if you currently owe $5,000 on a credit card with a $10,000 limit, your utilization ratio is 50 percent. Add another credit card with a $10,000 limit and you’ll still have $5,000 of debt, but $20,000 of available credit. While you still have a 50 percent ratio on the first card, adding the new card lowers your overall ratio to 25 percent. The lower your utilization ratio, the better. That’s why adding credit can do something counter-intuitive: increase your credit score.
Adding new cards will also increase the credit lines reflected on your credit history – the more history you have, the better. That’s why I’d keep the new cards. Exception? If they have annual fees. If so, it’s OK to get rid of them: if your credit history is long, diverse and stellar, cancelling the cards will have little, if any, impact.
What could be a concern is the effect of lots of new inquiries might have on your FICO scores. If you just applied for two cards, and now you want to apply for a third, your credit score might suffer from having too many recent inquiries. Fortunately, the effect is temporary and minor. Here’s what FICO credit score creator Fair Isaac says on the subject:
In general, credit inquiries have a small impact on one’s FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score… While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your score are how timely you pay your bills and your overall debt burden as indicated on your credit report.
In contrast, your payment history and level of debt constitute 35 percent and 30 percent of your score, respectively. So if you’re just about to apply for a major loan or refinance your house, you don’t want to apply for new cards and risk your credit score dropping below 760 – the number that will get you the most favorable rates from many lenders.
But if no major loan applications are coming up this year, I wouldn’t worry about getting a third card – go for it.