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Published:June 3rd, 2010 20:52 EST

Transferring Credit Card Debt: Wise or Wasteful?

By Philip Tirone


Transferring credit card debt to another card is one way many people try to lower to save money by lowering their interest payments. What they might not know, however, is that transferring credit card debt to another card might not be a smart financial mood. In fact, if you are learning how to build credit, this might be the last thing you want to do.


People who employ this method usually have a credit card with a large balance or a high interest rate. They decide that if they transfer their balance to a credit card with a lower rate, they can pay off the old credit card (maybe even earn some rewards along the way), and save money in interest.


Sounds like a smart move, right?


But transferring credit card debt has some pretty major pitfalls.


First, let`s talk about utilization rate. One of the biggest things credit-scoring bureaus consider when assigning your credit score is your balance as a percentage of your limit. If your balance is creeping pretty close to your limit, you will be given a lower score than if your balance is less than 30 percent of your limit. (Step One of 7 Steps to a 720 Credit Score "Philip Tirone, 2008 "is to keep credit card balances under 30 percent of the limit.) If you are thinking about transferring credit card debt, though, you might end up with a high balance on the new credit card. As a result, your credit score will be lowered, which means higher interest rates on future loans. Of course, this defeats you original goal of saving money!


If you have decided in favor of transferring credit card debt to another card, never transfer the balance upon opening the credit card account. Many of the credit card offers will allow you to specify the amount you want to transfer. Then they will decide your limit based on that amount. Let`s say you want to transfer $2000 to the new credit card. The creditor will likely decide that your balance is $2000, which means your balance will be 100 percent of your limit! This is bad news for your credit score. Instead, open the account before transferring credit card debt to another credit card. Then only transfer 30 percent of the new card`s limit.


If you already have five credit cards, never open a card just so you can transfer credit card debt to the new card. In a perfect world, you should never have three to five credit cards. If you have more or less than this, your credit card score will be lowered. If you already have five credit cards, do not close them because this too could hurt your score. But by all means, do not open new accounts just so you can start transferring credit card debt. This new credit card might hurt your credit score so much that you end up with higher interest rates on future loans.


If you can dodge all of the pitfalls of transferring credit card debt, then "and only then "can you take advantage of low-interest offers.