Below are three articles recently in the news along with our commentary. You can find out if transferring a balance to a 0% balance transfer credit card* is “in the cards” for you or the merits of paying for that shiny new car with a credit card. And, we show you how to help protect your hard-earned money if you are trying out some of the latest in card technology.
Juggling Debt: How Transferring a Balance Affects Your Credit Score
It can be an excellent way to pay off your debt. But how will transferring a balance to a balance transfer credit card* affect your credit score? And of what potential pitfalls should you be aware?
It’s impossible to predict exactly how any one financial decision will affect your credit score. It’s possible to guess based on what we know about credit-scoring algorithms, and credit score simulators can help show you how a particular choice might affect your score. Although you can get a fairly good estimate on the impact of certain actions, so many factors influence your score, that the exact effect of applying for a balance transfer credit card is difficult to predict.
If transferring a balance helps you save money and pay off debt faster, it’s most likely the right choice (regardless of the impact on your credit). You do want to be careful if you’re planning to apply for a larger loan, like a mortgage. Even a small ding at the wrong time can hurt you, and that can lead to higher payments and interest. Overall, transferring a balance and efficiently paying off debt will have a positive impact on your credit score over the long term.
TransUnion, CreditKarma and Chase all offer a credit score simulator. These tools allow you to predict what your future credit score will be if you take certain actions such as maxing out or paying off your credit cards, applying for a mortgage, or getting a car loan. One of the simulations offered is what impact applying for a balance transfer card offer will have on your score.
Our Commentary: I tried the credit score simulator provided at CreditKarma.com. That tool is powered by TransUnion, but you also get Equifax scores when you sign up to use the tool. Signing up also gets you signed up for your free credit score. I tried a few different scenarios. It shows your current credit score and then you select an action such as transferring a balance or opening a new card or getting a new loan and you can instantly see the estimated impact to your credit score.
How did I do? Well, I decided to transfer a balance of $5,000 on the tool and my score dropped about 47 points. Though I still maintained an excellent score rating overall, a 47 point drop is a big drop. I then played around with some numbers to see how that might change my score. So transferring from $1k to $5k, I lost the most points at 47 points. Transferring $7,500 was the sweet spot, only costing me 22 points. At $10,000, 27 points; $15,000, 35 points and $25,000 was 46 points down. Interesting to note that transferring $1,000 dropped me one point more than transferring $25,000. Go figure (credit scores can be strange and counter intuitive)! I am sure based on people’s different credit scores, their mileage will vary.
Overall, transferring a balance was the biggest negative impact. Opening a new card with a $7,500 credit line dropped my score one point - hardly an impact at all. I tried differing amounts for buying a new home. At $150k, I dropped 20 points; $300k was 24 points; $500k was 27 points, and I only lost 30 points by taking on a $1 million dollar mortgage. I am nowhere near ready to take on a million dollar mortgage, but it is nice to know I will still have excellent credit if I do so! Interesting side note: adding a $20,000 auto loan ADDED 14 points to my score. The increase must be due to varying up of my credit portfolio; adding a new installment loan (a secured loan) to my unsecured credit cards must have sweetened my mix of credit -having only one type of credit will hurt your score.
At the end of the day, transferring a balance showed to have the biggest negative impact of the actions I tested. If you are looking to take on a mortgage loan within the next year, you may want to think twice before transferring that balance. But, if you need to transfer a balance and are planning a mortgage, you may want to try out that tool to find your own sweet spot amount in order to minimize the negative impact to your score. If you determine you are interested in a balance transfer credit card, you may want to consider the Discover it® - Cashback Match™* card which offers 0% APR on balance transfers and purchases for 14 months or their card with 18 months at 0%*.
Can I Buy a Car with a Credit Card?
Perhaps the most important thing to consider: Dealers don’t want to accept credit cards. Just finding one willing to take a card for the entire purchase price will likely be impossible. That’s because merchants who accept them pay 1 to 4 percent to the card issuer in fees for each transaction they process. A dealership isn’t going to give up that much profit. It’s more likely that a car dealer will allow you to use a credit card for a portion of your down payment; their agreement with Visa, MasterCard, or American Express may also require them to accept payments by card.
Second, credit cards come with generous chargeback rights for customers who feel that they have been wronged by a seller. Just by placing a transaction into dispute, a customer could delay payment to the dealer for weeks or months. Most dealers are unwilling to accept that additional risk.
Additionally, credit card debt is considered unsecured, so the bank that issued the card can't repossess your car if you fail to make payments; a lender on a traditional car loan can repossess your car.
Our Commentary: This article is an insightful look at an out-of-the-box technique that a lot of consumers aren't aware of when it comes to using a credit card to purchase a new or used vehicle. My colleague Curtis Arnold has had personal experience over the last several years with using a credit card to buy both a new and used vehicle. He can testify as to how effective using a card in this manner can be based on two experiences. The key is being savvy and willing to negotiate.
Several years back, he put about $10K of a minivan purchase on a rebate card several years back and was able to get a cash rebate of a few hundred dollars. Then, before the bill came due for that card, he did a balance transfer to another low rate card and was able to enjoy 0% financing on the low rate card (the dealer didn't offer anywhere close to 0% financing). So, using a card in this situation was definitely a win-win!
The second more recent example (within the past year) involved some negotiation during the purchase of a travel trailer (works very similar to a car purchase). He was notified that the cap on credit card purchases was around $7500. He wanted to put around $10K on his cash rebate card so he could take advantage of the grace period (interest free period typically around 25 days) that just about every card offers and in order to get a larger cash rebate. The sales manager reluctantly agreed.
This example underscores the truth that many auto dealer policies are negotiable and that you as a consumer have power and should be willing to negotiate. Be kind, but assertive! :)
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*Disclaimer: BestPrepaidDebitCards.com is an independently owned and operated, advertising-supported financial product comparison service. Many of the credit card offers that appear on linked sites are from companies from which BestPrepaidDebitCards.com receives compensation.
Co-written by Shane Tripcony, personal finance blogger and web marketing consultant and Curtis Arnold, a nationally recognized consumer advocate and founder of CardRatings.com, the pioneering website that started posting the first credit card ratings online around 20 years ago. Curtis and Shane are the founders of BestPrepaidDebitCards.com, which provides ratings and reviews of prepaid cards and credit cards.
(Photo from Adobe Stock)