Selling tradelines has been written about on several reputable websites referring to it as a “$1,000 per hour side gig,” but is this true?
Technically, the answer is yes, but let us explain further. Keep reading this article to find out how to make money selling tradelines.
The Authorized User Tradeline Strategy
Do you remember hearing this old advice? “When your kids become young adults, add them to your credit cards as an authorized user to give them a head start on their credit.”
This credit-building strategy actually works, and now there is a way to get paid by doing the same thing for other people looking to build their credit profiles. Keep reading to find out how this works and why some people are earning thousands of dollars by selling their authorized user (AU) tradelines.
Is Selling Tradelines Really a $1,000 per Hour Side Gig?
You can earn money in minutes by selling authorized user tradelines on your credit cards.
At Tradeline Supply Company, LLC, commissions generally range from around $50 – $350 per AU spot sold. The older the credit card is and the higher the credit limit, the higher the commission will be.
The AUs only stay on the tradeline for two months in most cases, so there is relatively frequent turnover. On average, we usually allow our credit partners to sell two AU spots per credit card every two months.
The reason this works out to a four-digit hourly wage is really due to how little time it takes to work this gig.
Once you get familiar with adding and removing AUs from your accounts, you might be able to add someone in one minute and remove someone in 30 seconds since that often only requires a click of a mouse. A couple of banks allow you to add an AU online and then require you to call them to get the AU removed.
This said, let’s just assume on average adding an AU takes two minutes and removing an AU takes two minutes. An average commission is around $150 per spot. If you do the math, earning $150 in four minutes of work comes out to an hourly wage of approximately $2,250 per hour. On the higher end of the commission range, a $350 commission works out to be approximately $5,250 per hour based on time worked.
Watch your profits grow as you sell tradelines.
Obviously, the $1,000 per hour rate is not a true measure of how much you can expect to earn. A $1,000 per hour full-time job would earn someone over $2 million per year.
We are not saying you can make that much money, but if you calculate how much money you earn versus time spent, the numbers are in fact very impressive.
Perhaps a more realistic way to assess this opportunity is to look at how much time would be required to earn $10,000 selling tradelines in a year.
The people who earn over $10,000 per year usually have higher-paying cards, so their average commission would be closer to $250 per spot. To make $10,000, this person would have to sell 40 spots per year. With an average of four minutes of work per deal, this person would have spent approximately 2.67 hours of work to earn $10,000, which works out to around $3,750 per hour.
Are There Risks to Selling Tradelines?
Although the authorized user never receives any information about the credit partner, you can always add additional security measures to your account for peace of mind. Photo by Blue Coat.
Yes, there are some risks to selling tradelines. The main risk is the possibility of getting your credit card shut down. We estimate a 1-5% chance of getting your card closed depending on the bank and the number of authorized user (AU) spots you sell during a given period of time.
The good news is that you have control over how many AU spots you sell. If you have been consistently selling your AU spots out every cycle, you can always choose to pause your account between sales and give your cards a rest.
The key here is to avoid adding and removing too many AUs too quickly. You want your accounts to stay open so that you can stay in this game for the long haul.
The most common questions that most people immediately ask are “Is this even legal?”, “Can this affect my credit?”, and “What if the authorized user spends a bunch of money on my card?” The answers are yes, selling tradelines is legal; no, the authorized user will not affect the credit partner’s credit; and no, the authorized user cannot spend any money on your account.
The credit card companies will only send the AU card to the primary account holder’s address and the AU does not receive any information about the credit partner or their account whatsoever. Additionally, most banks offer extra security features such as account activity alerts, instant account freezes, and multi-factor authentication.
Why Isn’t Everyone Selling Tradelines?
The business of selling tradelines has remained sort of “underground” for many years. The knowledge of this option has largely relied on word of mouth through certain niche personal finance communities.
It takes a very unique type of individual who has built great credit, has multiple excellent lines of credit, and is willing to share that credit for money. This trifecta of qualities is extremely rare, so it does not make financial sense to broadcast this opportunity to the general public when the target demographic is so small.
This unique dynamic might explain why you may not have heard about this kind of financial opportunity until now.
How Do I Get Started Selling My Tradelines?
Getting started selling tradelines is easy. Just visit our website and enter your information into the box to instantly receive our current commission schedule and instructions with the next steps.
Being an authorized user on someone else’s credit card can often be a valuable strategy for consumers who are looking to build credit. However, it is not true that everyone will benefit from authorized user accounts in every situation.
In some cases, being added as an authorized user may have a neutral impact, which is to say that it doesn’t have much of an impact on your credit one way or the other. Furthermore, in some cases, becoming an authorized user could even hurt your credit score, which is obviously counterproductive.
So if you are interested in potentially adding an authorized user tradeline to your credit file, how can you ensure that this action does not backfire and end up having an adverse impact on your credit?
To address this question, let’s look at some cases in which it is not a good idea to be added to someone’s credit card account as an authorized user, from the perspective of credit expert John Ulzheimer. John provided his expert opinion on this topic in a Credit Countdown video on the Tradeline Supply Company, LLC YouTube channel, which you can view below this article.
Scenario 1: Being Added to a Young Account
Being added as an authorized user to a credit card account that has little age can be detrimental due to the ways it can impact your age-related metrics.
When we talk about credit age, which is also referred to as “time in file” or length of credit history, we do not mean your personal age. (It is a myth that your age affects your credit score.)
Rather, we are talking about the age of your credit report and the tradelines in your credit report. This is determined using various age-related metrics such as the age of your oldest account and the average age of all of your accounts.
The credit age category only makes up 15% of your FICO score, but the impact can still be significant because more age means more on-time payment history, which, at 35%, makes up the largest chunk of your credit score.
It is beneficial to your credit to have as much age as possible. The longer your credit history is, the more confident lenders can be that you pay back your debts, which is why these age-related metrics are important to your credit score.
If you are added as an authorized user to a new credit card, then the low age of the account can bring down your average age of accounts. According to John, this scenario could result in either your credit score going down, or it could “dilute” the other, more beneficial aspects of the authorized user relationship.
To prevent this common tradeline mistake from happening to you, be sure to choose an authorized user account that has as much age as possible so that it will not bring down your credit age and damage your credit score. Our tradeline calculator is a great tool to help you with this.
Ideally, John recommends being added to an account that is at least 20 years old, although this is certainly not possible or practical for everyone. If that is the case for you, just aim for as much age as possible.
Scenario 2: Becoming an Authorized User on a Heavily Utilized Card
Revolving utilization, which is often called the credit utilization ratio, is an important factor that contributes 30% of your FICO score. In this case, lower is better, because if you are utilizing too much of your available credit, this indicates that you are a larger financial risk for lenders.
For this reason, when it comes to your credit score, you want your credit utilization to be as low as possible.
Many consumers seek out authorized user tradelines with high credit limits, but if these accounts also have high utilization ratios, then being added to one as an authorized user could do more harm than good by increasing your revolving utilization instead of decreasing it.
The ideal credit card to become an authorized user on would have a high credit limit, but regardless of the credit limit of a credit card, its utilization ratio should be very low in order to avoid any negative effects.
Scenario 3: If the Credit Card Has a History of Derogatory Entries or Is Currently Delinquent
Of course, it is not a good idea to become associated with a credit card account that has a history of derogatory items or if it is currently past due. Your payment history is the most important determining factor of your credit score, making up 35% of it, so it is vital to maintain a perfect payment history on any account you are added to.
If you are added to a credit card that has any negative items in its payment history, it is far more likely to hurt your credit score than it is to help.
In the event that you are added to an account that has been or is currently delinquent, fortunately, you can have yourself removed from the card. Instead of wasting your time on this type of situation, however, the best thing to do is to ensure that a card has a perfect payment history before having your name added to it.
Scenario 4: If You Already Have a Low Credit Score or Derogatory Items on Your Credit Report
If your credit score is low already, don’t assume that being an authorized user is going to fix all of your problems.
Having a low credit score means you have some negative items on your credit report, and unfortunately, these negative items can act to balance out the potential effect of the authorized user account. One account with a good payment history can only go so far in diluting the impact of derogatory items on your credit report.
As another example, if you have a low credit score because you have several credit cards with high utilization ratios, then adding one card to your credit report that has a low utilization ratio may not be enough to move the needle overall.
In this kind of situation, it is important to be realistic and reasonable with your expectations.
Scenario 5: If the Card Does Not Report to All Three Credit Bureaus
An authorized user tradeline has no value if it does not appear on your credit report, and not all card issuers report authorized users to the credit bureaus. Many card issuers do choose to report authorized user data, but they are not required to do so, so it is not a guarantee.
That way, you can at least be sure that the tradeline will be posted to your credit report, which is a condition that needs to be met in order for the account to potentially have an impact.
Do you agree with these times when you should not be an authorized user? Let us know by commenting on this article or on the YouTube video below. For more helpful videos about tradelines and the credit system, subscribe to our channel and take a look at our valuable content!
Everyone wants to get a higher credit score, but not all of the “hacks” or tips being promoted actually help you get more credit score points. In a Credit Countdown video on our YouTube channel, credit expert John Ulzheimer answered some common questions about ways to get more credit score points and sheds some light on which strategies hold merit and which ones are just myths.
Do You Get More Points if You Pay Off Your Loans Early?
Although it might seem counterintuitive, paying off your loans early does not earn you more credit score points. When you pay off a loan early, nothing gets added to your credit report to show that you paid it off before the original term of the loan. Instead, your credit report simply shows that the balance of the account is now zero.
Getting to a zero balance may help your credit score slightly since credit scores consider the number of accounts with balances you have, but this does not have anything to do with the timing of when you pay off the loan.
According to John, he knows of a consumer who had a truck loan and paid it off early because someone had told them that paying off their truck loan sooner would boost their credit score and this would help them refinance their mortgage to get a better deal.
Following this bad advice, the consumer even went so far as to take a loan out of their 401(k) retirement account in order to pay off the truck loan.
Unfortunately, the person’s credit score did not change at all as a result of paying off the truck loan.
The reason why this strategy failed to help the person’s credit score is that the debt wasn’t even hurting their credit in the first place! The truck loan was an installment loan, and installment loans (unlike revolving credit) are virtually benign to your credit score. Since the account wasn’t actually bringing down the consumer’s credit score, getting rid of the debt had no effect.
Do You Get More Points if You Pay More Than the Balance?
This “trick” is supposed to make your credit score go up by paying more than the balance owed on a credit card account.
While this may give you a “credit” on your credit card account, in credit reporting, there cannot be a negative balance associated with a credit card account. Whether you pay the balance in full or pay “extra” money, the account will report a zero balance to the credit bureaus, which will be reflected on your credit report.
Not only does this tip not help your credit score, but it also ties up your money in a place where it is not working for you by earning interest, and you have to buy things with your credit card in order to use the funds you put toward your card’s balance.
Paying your balance in full every month is always the best option because that way you can avoid paying interest, but there is no need to go overboard by paying a greater amount than what is actually due.
Paying more than what you owe on your accounts won’t get you more credit score points.
Do You Get More Points if You Make Multiple Payments Each Month?
There is some truth to this recommendation, but it does not exactly work in the way that proponents of this strategy often claim.
Usually, the thinking goes that by making multiple payments each month, you can “trick” the system into giving you more points, but that’s not how it works. You can’t “trick” the credit scoring system.
In reality, the credit scoring models do not indicate the number of payments you have made per month. It only shows the total amount of all the payments you made during that month added together.
However, there is a different reason why this strategy may actually earn you a few extra credit score points.
When you make multiple payments within a billing cycle, you are paying down some of the balance before the statement closing date, which is when your account balance gets reported to the credit bureaus. Therefore, because of the early payments, the balance reported to the credit bureaus will be lower, which helps boost your credit score by reducing the individual utilization ratio on that account as well as your overall credit utilization ratio.
When you are paying for purchases, is it better to use a debit card or a credit card?
The answer depends on which features and advantages are important to you. In a Credit Countdown video, credit expert John Ulzheimer compares the pros and cons of credit cards and debit cards in regards to several different metrics, such as fraud protection and credit-building ability.
Read the article about this subject below and then catch the Credit Countdown video at the bottom of the page or on our YouTube channel.
The Basics: How Debit Cards and Credit Cards Work
Credit cards and debit cards may look very similar and feel similar when you make a purchase, but the two payment methods work completely differently.
A debit card is linked to your checking account. When you pay for something using a debit card, the money you spent is being debited directly from your bank account. In other words, you are using your own money to pay for the item immediately.
A credit card is, of course, a form of credit, meaning that you are borrowing someone else’s money. In this case, the credit card issuer is your lender. When you swipe a credit card, you are essentially borrowing money from the bank to pay for the purchase with the agreement that you will pay back the debt, plus any applicable interest charges and fees, later.
Credit cards are revolving credit accounts, which means you have the option to carry a balance from month to month while making only the required minimum payments instead of paying the full balance when you get the bill.
If a fraudster gets ahold of your card, which type offers better protection?
With a debit card, fraudulent purchases have already deducted the funds from your checking account, and it may be difficult to get your money back.
If your credit card is stolen, it’s the bank’s money that is directly at risk, not yours. Beyond that, credit cards generally have excellent fraud protection policies.
The Fair Credit Billing Act (FCBA) mandates that you, as a consumer, can only be held liable for a maximum of $50 in the event of credit card fraud. Even better, the major credit card networks all offer $0 fraud liability policies, which means nothing has to come out of your pocket if your credit card is used fraudulently.
Credit cards provide strong fraud protection policies to limit your liability if your credit card information gets stolen.
There’s no comparison when it comes to credit building: only credit cards can help you build a credit history. The credit card issuer reports your activity to the credit bureaus, allowing you to accumulate credit age and on-time payment history if you manage the account properly.
The credit limit of your credit card also contributes to your revolving utilization, which may help your credit score as long as there is not a high balance on the account.
Obviously, debit cards are not a form of credit because you are not borrowing money. Therefore, you do not make payments to a lender and so your activity is not reported to the credit bureaus. For this reason, debit cards do not show up on your credit reports and cannot help you build credit.
Spending Capacity (Buying Power)
The buying power of a debit card is limited by how much money you keep in your bank account. It’s not necessarily a good idea to keep a lot of money in your checking account, where it is likely earning very little interest compared to what you could earn by investing the funds elsewhere.
Credit cards, on the other hand, typically provide more buying power because you are only limited by the credit limit set by the credit card issuer, which may be quite generous if you have a decent credit score. Since you do not need to pay off the balance immediately, you do not have to worry about maintaining a large stash of cash in your bank account.
Certain transactions require you to use a credit card or are much easier to complete with a credit card.
This includes many activities related to traveling, such as renting a car or paying for a hotel room. In addition, such businesses may place a temporary “hold” on your account, which is not as much of an issue when you have available credit on your credit card compared to having a hold placed on your checking account, which could cause other transactions to be declined.
This is the category where debit cards excel. If you struggle to control your spending and stay within a budget, it’s actually a good thing to have less buying power and no access to credit.
Credit cards, if used correctly, don’t require you to get into credit card debt in order to get the advantages of using a credit card. However, the higher spending limit and the ability to carry a balance can be powerful temptations to buy more than you can afford to pay off.
So, which payment method wins in your opinion? Use the table below to decide.
Debit Cards Credit Cards
Source Your bank account The credit card issuer
Fraud Protection Limited Strong
Credit-building Ability No Yes
Buying Power Limited to the balance of your bank account Limited by your credit limit
Usability Limited in some situations Widely accepted
Budgetary Control Yes No
Check out the Credit Countdown video with John Ulzheimer on our YouTube channel for more information about credit cards vs. debit cards!
The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I have received a settlement offer on an old credit card debt from years ago when I was out of work. Would it be better to let it fall off after the six-year statute in Arizona? I am in great financial health and this is the only bad mark on my credit.
Based on the question, it appears that you are taking extra care to make the best decision regarding your credit health. For that, I applaud your efforts to research the facts. Sometimes an offer to settle a debt can lead to a hasty decision that may not always be best. Let’s take a moment to examine all of the elements to consider before rendering a decision that will impact your financial future, one way or another.
Deal or No Deal
First, there’s the settlement itself. Settling your account is commonly viewed by lenders as being less favorable than paying the balance in full. If reported accurately following the settlement, the account status would appear as “settled for less than the full balance” on your credit report. When it comes to the credit score impact of settling or paying a collection account, the answer depends on the scoring model being used. More recent versions of FICO® and VantageScore® won’t factor collection accounts that have a zero balance. That seems like great news, but some lenders use older versions when reviewing loan applications for approval. This is most commonly the case when applying for a mortgage. In those situations, your credit score will not likely experience the same lift.
Running Out the Clock
Apart from the settlement, there’s the matter of the account’s age. We have addressed the topic of the statute of limitations and time-barred debts in previous posts, but I can’t place enough emphasis on the wild card variable that involves the debt collector’s decision to escalate the account. Having worked as a debt collector in the past, I am quite familiar with the process of evaluating unpaid accounts for escalation before the clock runs out. In Arizona, the timer starts when the account charges off. That means the debt collector is now asking that you pay the entire balance in full. For that specific state, you are correct that the statute of limitations is six years.
Will They or Won’t They
If they know where you live and work, and if they determine that the unpaid balance of the account is sufficient enough, they may decide that it is worth the effort to file a case in civil court in pursuit of a judgment against you for the amount of the debt plus interest and court costs. Again, this is also driven by how much time is left on the clock. If the court decides in their favor, they could proceed to recover the balance through legal processes allowed in your state. In Arizona, for example, wage garnishment is allowed at one-quarter of your non-exempt weekly paycheck or an amount of your weekly earnings that are greater than 30 times the federal minimum wage, whichever is the lessor of the two. There are other factors influencing wage garnishment in Arizona, and the rules for other states vary, so it’s always a good idea to check with an attorney to confirm what might directly impact your situation.
Ultimately, the decision on the next steps rests in your hands, but whatever you decide should leave no room for surprises. That’s why I would recommend spending a little time consulting a nonprofit credit counselor for a more detailed and personalized review of your situation. Armed with their advice and what you have learned through your own research, you would be in a much better position to make the most informed choice for yourself. Good luck with your next steps!
The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I took on too much debt and went without a job for 23 months. I am now employed and currently paying off my last, charged-off credit card. Should I open a new line of credit or just continue to pay my debt to rebuild my credit?
Getting back on your feet after a period of unemployment and high debt is a huge accomplishment. Rebuilding your credit depends on multiple factors and on where you stand with your overall credit and finances. So, in your situation, I recommend doing it all: pay all your bills on time, continue to pay down your debt, and rebuild your credit health with positive account activity and a new line of credit.
As you work to improve your credit, you should know which factors influence your score and learn how to use them to benefit your score. These factors include paying your bills on time, keeping your utilization ratio low, how often you get new credit, the types of credit you have, and for how long you’ve had credit.
Ways to Improve Your Credit
Arguably, the most important thing you can do for your credit is always paying your bills on time. This should become second nature so that you build your credit now and maintain a good score in the future. Then, if you don’t have an active account on your credit files, you could apply for a new credit card in order to generate a positive credit history on your credit reports. One sure way to open a new account is to apply for a secured credit card. Secured credit cards are offered by many banks and have a variety of perks and fees. Apart from looking and acting like any other type of credit card account, the primary differences are that you are approved without a credit check and you need to send a security deposit when you open the account. This deposit typically becomes collateral that establishes your credit limit and it’s returned to you if you close the account or if your account is upgraded to an unsecured credit card.
Once you have your credit card, use it strategically. This means paying on time and keeping your utilization ratio below 30%. Your utilization ratio is how much of your available credit you are using. So, when you have high credit card debt, you appear at risk of losing control of your financial stability, which brings your score down. That’s why you should continue to pay off your debt in order to reduce your utilization ratio.
The other factors—the age of your credit, the types of credit you have, and how often you use your credit—are also important to a lesser degree. How old your credit is only will improve with time, so be patient. The mix of credit looks at the type of credit you have—credit cards and loans. But, right now, let’s focus on the primary factors. And last but not least, that’s how often you apply for new credit. When you ask for a new credit line, a hard inquiry is generated, and it remains on your report for 24 months. Too many inquiries bring down your score. So, you must be selective and strategic about getting new credit lines.
As you can see, building your score comes down to being strategic about how you use your credit in every transaction. When you have the tools and the right plan to improve how you manage your credit, it becomes easier to make financial decisions that build a stronger credit rating. If you need help with more personalized strategies to work on your credit, you can reach out to an NFCC Certified Financial Counselor.
It’s never a good feeling when you notice that your credit score has dropped. You might feel confused or concerned, and you would probably wonder why your credit score took a dip. Let’s explore some of the possible reasons that could cause your credit score to decline.
Your average of accounts decreased because of a new account.
As we’ve written about many times in the articles in our Knowledge Center, the age of a tradeline is extremely important, as is your overall credit age. This is because credit age is linked to payment history, which is vitally important to your credit health.
Payment history makes up 35% of your credit score and credit age contributes 15% to your score. When you add the two together, you get 50%, which means that half of your credit score is controlled by these two connected factors.
Within the credit age category, your average age of accounts is thought to be one of the most important variables. The more age your tradelines have, the more they can benefit your credit. Therefore, anytime you decrease your average age of accounts, you run the risk of your score decreasing as a result.
So if you recently opened a new primary tradeline or if you were added as an authorized user to an account that lacks age, the decrease in your average age of accounts might be what’s behind your credit score troubles.
Your account balances increased.
Did you use credit to make a large purchase recently? Have you been accumulating more debt by not paying the full balance you charged each month? If either of these scenarios is true for you, that could explain why your credit score took a dive.
As your account balances increase, so does your credit utilization rate. This is bad news for your credit score since credit utilization contributes about 30% of your score.
If you’ve been using your credit card more often without paying it off entirely each month, that could be the source of the change in your credit score.
Low utilization is favorable since it indicates that you are not overextending yourself financially. On the other hand, high utilization shows that you are using a lot of your available credit, which means you are statistically more likely to default on a debt in the future. For this reason, high credit utilization is penalized by credit scoring models.
Fortunately, there are many strategies you can use to overcome the problem of high revolving credit utilization, such as pre-paying your credit card bill before your statement closing date, making more frequent payments throughout the month, increasing your credit limit, or getting a balance transfer card.
When you open a new account, it can hurt your credit score for a few reasons. The first and most important reason is that the account has no age, which means it is going to negatively affect your average age of accounts.
The new account may also have a negative impact on the “new credit” portion of your credit score. Having new credit makes you look like a riskier borrower, which means it could slightly reduce your score.
However, new credit only makes up about 10% of your credit score, so the impact of opening one new account would likely be relatively small and it would diminish over time.
You applied for credit but your application was denied.
Applying for a loan or credit card, whether your application is approved or denied, the resulting hard inquiry could damage your credit score slightly.
As we just mentioned, when you apply for credit, the lender usually has to do a hard pull (AKA a hard inquiry) on your credit report to see if you qualify.
This doesn’t always result in a new credit account being opened. Sometimes, for example, your credit application might get rejected by the lender, or perhaps you may choose to decline the terms you were offered and not proceed with opening the account. (Note, however, that when you apply for a credit card, typically the account is automatically opened when you get approved for the card.)
Unfortunately, even if you didn’t actually end up opening a new account, the fact that you applied for credit can still hurt your score. The hard inquiry still goes on your credit report whether you opened an account with that lender or not.
If you only applied for one account, then your credit score will likely only fall by a few points, if at all. If you applied for several accounts that you didn’t open within the past year, however, it’s possible that you could see a bigger dip in your score as a result of all of those inquiries on your report.
You missed a payment once or twice.
You might think that missing a payment here and there is not that big of a deal, but in reality, it can wreak havoc on your credit score. Recall that payment history is the most important factor contributing to your credit score, weighing in at 35% of your FICO score.
If you are 30 days late on making a payment even one time, this can have a significant detrimental effect on your credit, dropping your score by as much as 60 to 110 points.
If you still fail to make your payment by the following due date, then you get a 60-day late on your credit report, which hurts your credit even more.
30-day and 60-day lates are both considered minor derogatory items on your credit report, so they won’t mess up your credit as much as a major derogatory item.
However, if you get a 60-day late payment added to your credit report, do your best to catch up on payments before another 30 days pass, which is when things get even worse.
You missed a payment for three months in a row or more.
Missing a payment even once can seriously set back your credit score, but the damage will be even worse the longer you put off bringing the account current.
Once you reach 90 days past due on a credit account, that is now considered a major derogatory item, which is the worst possible type of item to have on your credit report. (Other major derogatory items include charge-offs, collections, foreclosures, settlements, judgments, repossessions, public records, and bankruptcies.)
Having a 90-day late on your credit report is certainly going to have a negative impact on your credit. A credit score drop from a major derogatory item will be even more severe and more difficult to recover from than that of a minor derogatory item. In addition, the major derogatory item could scare away potential lenders, making it harder to obtain credit in the future.
If you default on a debt, meaning you did not fulfill your obligations to repay that debt, your creditor can sell your account to a collection agency, who will then try to collect the debt from you. A collection account is also a major derogatory item on your credit report, which means it can seriously hurt your score if you have an account go into collections.
You applied for multiple credit cards in a short period of time.
Applying for multiple credit cards results in hard inquiries on your credit report, which can have a more significant impact on your score than just one inquiry.
Having too many hard inquiries on your credit report in a short period of time indicates that you are seeking a lot of new credit, which is a bad sign to lenders, and it will bring down your score.
With most credit scoring models, inquiries for credit cards are all counted separately, even if they were all around the same time. Since inquiries can each cost your credit score up to five points, that can add up quickly. (The exception to this is the VantageScore credit score, which counts all inquiries made within a 14-day window of each other as one inquiry, regardless of the type of account.)
Furthermore, if you got approved for and opened all of the accounts that you applied for, then you could also end up with too many new credit accounts on your credit report.
One of your credit cards was closed.
Many consumers mistakenly believe the credit myth that it will help their credit if they close some of their accounts. In a way, that makes sense, because it lowers the amount of available credit you have, which reduces the potential amount of debt you could get into if you were to use all of your available credit.
However, that is not how credit scores work, because unfortunately, credit scores don’t always make sense.
The truth is that closing an account almost always hurts your credit instead of helping it.
With revolving accounts, such as credit cards, closing an account reduces your total credit limit by removing the credit limit of that card. When you reduce your credit limit, that action increases your overall credit utilization ratio, meaning that you are now using a larger fraction of your available credit.
This hurts your credit score because having a high credit utilization ratio is penalized by the credit scoring algorithms, whereas maintaining a low utilization ratio is rewarded.
The worst-case scenario for your credit when closing an account is if the account is closed while it still has a balance on it. In this case, that individual account will look like it is maxed out or over the limit because it has a balance but no credit limit. That alone is enough to significantly harm your credit, and the increase to your overall utilization ratio only worsens the problem.
Depending on what else is in your credit file, closing a credit card could also negatively affect your credit mix, which could result in a small credit score drop.
On the plus side, the reason why an account was closed does not play a role in your score, so you won’t be affected more negatively if the card was closed by the issuer than if it was closed at your request.
An unexpected decrease in your credit score could be the result of fraudulent activity on your accounts.
If you see any charges on your statement that you do not recognize, then it could be fraudulent activity that is bringing down your score. Perhaps someone was able to obtain your credit card information by phishing or through a data breach and used it to run up the balance on the card.
It’s important to monitor your credit accounts regularly so that you can catch any suspicious activity early on. Better yet, set up email or mobile notifications on your account that will alert you to fraudulent activity instantly.
If a criminal does manage to get access to your account, report the fraudulent charges to your credit card issuer immediately and ask to have the charges reversed. Most credit card companies have a zero liability policy, which means you won’t be held responsible for paying for any of the fraudulent charges.
You paid less than the minimum payment.
If your cash flow is tight, it can be tempting to send the bank or credit card company a partial payment instead of the full amount that is due that month. You may think that it’s not as big of a deal as not paying at all, because at least you are sending them some of the money.
Unfortunately, it doesn’t work that way. If you do not cover the full minimum payment by the due date, it will not be counted as an on-time payment.
If you can bring the account current before 30 days pass, you may still have to deal with a late fee from your credit card issuer (although it’s worth asking them to waive the fee), but at least the late payment will not show up on your credit report.
On the other hand, if you do not make a sufficient payment and 30 days go by, then you will have a late payment pop up on your credit report, which can definitely take a toll on your credit score.
To prevent this from happening, as soon as you know you will not be able to make the full payment, contact your credit card issuer and ask if they have a financial hardship program or try to negotiate an arrangement with them that allows you to pay what you can without damaging your credit.
You didn’t use your credit card for a long time.
Your credit card issuer might have closed your account if it had been inactive for a long time.
If you don’t use a credit card for a long period of time, it’s possible that your credit card issuer may decide to close your account due to the lack of activity.
As we discussed above, a closed credit card is bad news for your credit since the loss of available credit hurts your credit utilization and it may also damage your mix of credit.
According to The Balance, the credit card company is not required to give you advance notice if they plan to close your account, so it’s best to take proactive measures to prevent this from happening.
To avoid having your card closed due to inactivity, make sure you use it to make a purchase at least once every few months. An easy way to do this is to use the credit card to pay for a subscription service that renews each month. Then, set up automatic bill payments on your credit card and the whole process will be automated.
You finished paying off an installment loan.
Making the final payment on your auto loan, student loans, or mortgage is an exciting accomplishment. Yet, when you finish paying off an installment loan, your credit score may decrease instead of increase.
Even though you now have less debt, which sounds like it would help your credit score, this may not outweigh the negative impact to your mix of credit. The paid-off installment loan will now report as a closed account, which can be harmful to your credit if all you have left is a few revolving accounts.
@LizOfficer shared a real-life example of this on Twitter.
This Twitter user commented that paying off her loan made her credit score go down since it affected her mix of credit.
An account that you are piggybacking on became delinquent.
Sometimes being an authorized user on a credit card or having a joint account can be a risky thing. You are relying on the other person to pay their bills on time and to manage their balances well, otherwise their behavior can compromise your credit.
In other words, an ideal tradeline should have a low utilization ratio, it should have a higher age than your average age of accounts and your oldest account, and most importantly, it needs to have a perfect payment history.
Therefore, you want to avoid being added as an authorized user to a tradeline that has any derogatory marks on it so that those derogatory items don’t get added to your credit file and end up damaging your credit.
That’s the danger of piggybacking on a friend or family member’s credit card—even if the tradeline is perfect when you are first added to it, there’s no guarantee that it will stay that way.
If your authorized user tradeline does get any missed payments on its record, that could definitely hurt your credit, and it would be smart to remove yourself from it immediately. To do so, simply call the credit card issuer and request to be removed from the account, as most banks allow you to do this without needing to go through the primary account holder.
Delinquency on the part of the primary account holder can cause problems if you are piggybacking on someone else’s credit account.
You declared bankruptcy.
Bankruptcy is one of the worst things you can have on your credit report. Since declaring bankruptcy essentially means you are asking to be released from the legal obligation to repay your debts, it shows lenders that you have an extremely high risk of defaulting in the future, so it can have a severe negative impact on your credit score.
There are inquiries on your credit file that you did not authorize.
Unauthorized inquiries on your credit file can unfairly drag down your credit. In our article on credit inquiries, we reported that each hard inquiry on your credit report can potentially cost you up to five points each.
Sometimes inaccurate information can get on your credit report not as a result of fraud or because your lender reported it incorrectly, but because your credit file accidentally became mixed with the information of another person.
This is called a “mixed credit file” or “mixed credit report” and it usually occurs with two consumers who have similar names.
If the credit history of the other consumer with whom your file has been mixed contains negative information, that would obviously be detrimental to your score, and you would need to correct the situation by filing a dispute with the credit bureau.
This is an example of why it’s important to check your credit report regularly. If there is incorrect information on your credit report that should be removed, you don’t want to find out about it when you’re trying to apply for credit. You need to catch and correct credit report mistakes early so that they don’t stand in the way of you achieving your financial goals.
You maxed out one or more of your credit cards.
Credit utilization makes up nearly a third of your FICO score, which means it’s critically important to keep your utilization low if you want to maintain a high credit score. Maxing out even just one credit card can have a significant negative impact, and if you max out multiple cards, you’ll be even worse off.
An account on your credit report that you don’t recognize could be an account that someone else fraudulently opened in your name.
We already covered how opening a new account can negatively affect your credit initially, but don’t forget that the same thing can happen if someone else uses your name to sign up for a new account.
If you see that your credit score has decreased, take a look at the inquiries and accounts on your credit report to see if there are any items that should not be there.
You have “double jeopardy” with collection accounts on your credit report.
Debt collection agencies are not known to be the most trustworthy entities and often do not have the best practices when it comes to keeping track of debts and contacting consumers. Information often gets lost or misrecorded when it is transferred between creditors and sometimes numerous collection agencies.
Because of this, some consumers find themselves with more than one entry for the same open collection account on their credit report, which is known as “double jeopardy.”
While the same collection may be listed multiple times due to the account changing hands, only the entity who currently owns the debt should be reporting the account as open.
Fortunately, if a collection is being reported in error, you can dispute the inaccurate information and have the information be corrected or potentially removed altogether.
Your credit report says you missed a payment even though you paid on time.
Dispute any mistakenly reported late payments so that they don’t unfairly affect your credit score.
Since payment history is the most important factor in your credit score, an incorrectly reported missed payment could severely damage your credit, especially if you are starting with very good credit. The higher your score to begin with, the more you stand to lose from a credit mistake.
This type of situation is another example that demonstrates why it’s so crucial to regularly check your credit report. If you always made all of your payments on time, you might assume that you must have a spotless credit record, only to find out at an inconvenient time that a creditor has been incorrectly reporting that you missed a payment.
Keep an eye out for errors like this on your credit report so that you can dispute them right away.
Your credit card issuer reduced your credit limit.
Sometimes, credit card issuers lower the credit limits of their cardholders, even for those who have consistently managed their accounts responsibly.
Unfortunately, they are usually allowed to do this without asking for your permission or letting you know in advance, so it may come as a nasty surprise when you swipe your credit card and get declined, or when your credit score takes a dive because your credit utilization is suddenly much higher.
There are a few reasons why your bank may reduce your credit limit, such as the following:
Credit card issuers sometimes cut credit card limits, which hurts your credit utilization ratio.
Your balances have been increasing, which indicates that you are taking on more debt and might be at a greater risk of defaulting. You missed a payment and your account becomes delinquent. Your account was inactive because you did not use your credit card enough. The economy is down and lenders want to minimize their risk exposure levels.
Regardless of why your credit limit took a hit, the result is the same: with less available credit, your credit utilization increases, which is bad for your score.
If your credit card issuer slashed your credit limit, check out “How to Increase Your Credit Limit” for some useful tips, and don’t be afraid to give your bank a call to ask them to reconsider.
A collection account was deleted from your credit report.
Surprisingly, it is actually possible that getting a collection account removed from your credit report could make your credit score go down instead of up.
By removing a collection account from your credit report, it is possible that you could move from one bucket into another bucket where your score will now be calculated differently. As a result of this new algorithm being applied to your credit report, your score could turn out to be lower than it was when you were in the first bucket.
You haven’t used any credit in a long time.
If you have used credit in the past but not recently, some of your old accounts may have fallen off of your credit report altogether. Accounts that are closed or inactive do not stay on your credit report forever. Positive accounts will generally stay on your credit report for 10 years, whereas negative accounts may stay on your credit report for up to 7 years.
When these old accounts age off of your credit report, you lose all of the credit history associated with them, the most important of which is the payment history. Because you are losing valuable credit history, your score could take a hit.
Those with thin credit files or those who have not used credit in several years will need to focus on building credit in order for their credit score to recover.
When it comes to your credit score, minor fluctuations are normal, so there’s generally no need to fret about losing a few points here and there.
If you are practicing good credit habits and paying all of your bills on time, it’s probably not necessary to watch your credit like a hawk and check your score every single week, and a change of a few points in either direction should not cause you to panic.
However, as we have seen, you don’t want to neglect your credit entirely, since mistakes can and do happen.
In addition, keep in mind that credit moves can sometimes have unexpected results, particularly in cases where you may be migrating from one credit scoring “bucket” to another.
If you see a significant drop in your credit score, that is definitely worth investigating further so that you can understand why it happened, address the issue, and hopefully get some of those credit score points back.
It’s a question we hear all the time from people who are new to the tradeline industry. Perhaps you have even asked it yourself. In this article, we explain how tradelines work and how they can affect your credit.
What Are Tradelines to Your Credit?
While the term “tradeline” simply means any credit account, in our business, it usually refers specifically to authorized user (AU) tradelines, or authorized user positions on someone’s credit card. An AU tradeline is an account on which you are designated as an authorized user, which means you are not liable for the charges incurred on the account. However, the tradeline can still affect your credit file.
How Do Tradelines Work?
When someone is added as an authorized user to someone else’s account, often the full history of the account is then reflected in the records of both the primary account holder and the AU. This is because credit records do not report the date the AU was added to the account. So, as soon as the AU is added, their credit report may begin to show years of history associated with the account.
Therefore, authorized user tradelines can be used as a way to add credit history to someone’s credit report.
One common example of this is when a parent designates their child as an authorized user of one of their credit cards as a way to help them start building credit early in life. In fact, this practice of building credit as an authorized user, often called “credit piggybacking,” is frequently promoted by banks and financial education sites.
What Are Tradelines Used For?
Parents often use piggybacking as a strategy to help their children build credit early in life.
As we mentioned, tradelines can add years of credit history to your credit report. The power of a tradeline is always relative to what is already in your credit file, so if you are interested in building credit as an authorized user, make sure to choose a tradeline that surpasses what you already have in your credit profile.
How Do Tradelines Affect Your Credit?
Adding quality tradelines to your credit file can influence many of the variables that are related to your credit, such as your average age of accounts, age of oldest account, overall utilization ratio, number of accounts, mix of accounts, and more.
The most important factor that tradelines bring to the table is age, because with age also comes perfect payment history. These two factors combined are the most significant influence on one’s credit.
Due to the power of these factors, adding AU tradelines to your credit file is often preferable over opening new primary tradelines. This is because new primary tradelines will have no age and will probably have relatively low credit limits, which can drag down important metrics in your credit file.
Authorized user tradelines, which are authorized user positions on someone’s credit card, can be used to build credit history.
In contrast, authorized user tradelines already have significant age and high credit limits.
Can You Buy Tradelines?
The tradeline industry took this concept of “piggybacking credit,” as it is often called, and created a marketplace where tradelines could be bought and sold. Essentially, people who want to add tradelines to their credit file can pay a fee to be an authorized user on someone else’s credit card, even if the two parties are complete strangers.
Tradeline companies serve as the intermediary, protecting the privacy of both the cardholders and the authorized users and facilitating the transaction.
A marketplace now exists where consumers can pay a fee to piggyback on others’ tradelines as authorized users.
Tradelines have been around since the advent of the modern credit system. Virtually as long as credit cards have existed, people wanted to be able to share access to their account with others, such as spouses, children, or employees.
However, the role of authorized users was not always considered equally by the credit bureaus. Until the Equal Opportunity Credit Act of 1974, creditors often used to report accounts that were shared by married couples as being only in the husband’s name. This prevented women from building up a credit history in their own names.
In response to this unequal treatment, ECOA was passed to prohibit discrimination in lending.
Regulation B is a section of ECOA that requires creditors to report spousal AU accounts to the credit bureaus and consider them when evaluating credit history. Since lenders generally do not distinguish between AUs who are spouses and those who are not, this effectively requires that credit bureaus must treat all AU accounts the same.
The Equal Credit Opportunity Act prohibits credit discrimination.
It was as a result of this policy that the practice of “piggybacking credit” emerged as a common and acceptable way for consumers with good credit to help their spouses, children, and loved ones build credit.
Thanks to ECOA, authorized user tradelines are still weighted very heavily in credit scoring models.
While Tradeline Supply Company, LLC does not provide legal advice, we can answer this common question by referring to official proceedings and statements from the authorities.
The issue of tradelines and credit piggybacking went all the way up to the U.S. Congress in 2008, when FICO tried—unsuccessfully—to eliminate authorized user benefits from its credit scoring model. They ultimately reversed their stance and decided to keep factoring AU benefits into credit scores thanks to the Equal Credit Opportunity Act of 1974.
The Federal Trade Commission and the Federal Reserve Board have also weighed in on this topic. In 2010, the Federal Reserve Board conducted a large-scale study on piggybacking and found that over one-third of the credit files that could be scored had at least one AU account in their credit profile, which shows that piggybacking credit is an extremely common practice.
After the issue of piggybacking credit was discussed in Congress, FICO admitted that it could not legally eliminate authorized user benefits.
Learn more about your legal right to use authorized user tradelines in our article, “Are Tradelines Legal?”
How Do I Add Tradelines to My Credit Report?
To add tradelines to your credit report, you can either open your own primary accounts or you can be added as an authorized user to someone else’s credit account. For many people, it is difficult to start building credit on their own because creditors are hesitant to lend to someone with no credit history, which is why the authorized user route is an appealing option.
If you are seeking to add authorized user tradelines to your credit report, you can either ask someone you trust to add you to one or more of their accounts or purchase tradelines from a tradeline company. The benefit of buying tradelines as opposed to asking for a favor from someone you know is that all of our tradelines are guaranteed to have perfect payment histories and low utilization.
How Much Does It Cost to Buy Tradelines?
Our tradelines range in price from $150 to around $1,500 depending on two main variables:
The tradeline’s age The tradeline’s credit limit
Our tradelines stay on your credit report for about two months.
Generally, the older the tradeline is and the higher the credit limit is, the more powerful it will be and the higher the price will be (and vice versa). We delve into further details and examples of the cost of tradelines on our FAQ page, “How Much Do Tradelines Cost?”
How Long Does a Tradeline Stay on Your Credit Report?
Our tradelines stay on your credit report for two reporting cycles, which is approximately two months.
After the two months of being an active authorized user is complete, you will be removed from the account and the tradeline will then appear as closed. A closed tradeline will often remain on your credit report for several years.
However, your strategy may vary depending on your specific goals. There are some situations in which the credit limit can be more important. Our in-depth tradeline buyer’s guide that has all the information you need to help you choose a tradeline.
In choosing the right tradelines for you, It is helpful to be able to calculate how a tradeline could affect your average age of accounts and utilization ratios. Try out our custom tradeline calculator, which does the math for you!
How many tradelines you need depends on your specific situation. There are different cases in which buyers may want to get two or three tradelines, or sometimes even more, but there are other cases in which one tradeline will suffice.
If you really want to maximize your results and you have the budget to do so, buying multiple high-quality tradelines is the way to go. However, if you have budget constraints to deal with, it is usually best to focus your resources on one excellent tradeline.
Historically, only those with privilege and wealth have been able to use the strategy of credit piggybacking. Those who do not have family members with good credit to ask for help, or could not afford the high cost of tradelines, had nowhere to turn, so their options for building credit are often extremely limited and very costly.
To us, it does not seem fair that some people have the option of credit piggybacking but others do not. By offering tradelines at affordable prices, we aim to bridge this gap and help provide a chance at equal credit opportunity for all.
Most of the time, when we talk about credit, we are talking primarily about the impact of open accounts. But are we underestimating the importance of closed accounts? Let’s shed some light on the less commonly addressed question of how closed accounts can affect your credit.
What Is a Closed Account on a Credit Report?
A closed account on your credit report is simply any credit tradeline that has been closed, whether it was terminated by the customer or the creditor.
There are several different reasons why an account may be closed.
If you don’t use your account for several months, it could get shut down for inactivity. Photo by Hloom on Flickr.
If you don’t use a credit card for several months, for example, you could get your credit card closed for inactivity. In this case, your credit report might say “account closed by credit grantor” for that account since the lender was the party who terminated the account.
Other reasons a credit card may be closed by the creditor include:
The credit card issuer is no longer offering that type of credit card or is replacing it with a different card The credit card issuer determined that there was fraudulent activity on the account The card was stolen or lost
Consumers may also want to close their own credit accounts from time to time, in which case the account might be notated as “account closed by consumer.” As an example, if one of your credit cards increases its annual fee or if you no longer feel that the fee is worth it, you might decide to close that account.
What Do Closed Accounts Mean on Your Credit Report? Closed Accounts and Credit Utilization
Use our tradeline calculator to calculate your credit utilization ratios.
Now that you know what a closed account is and why an account may be closed, you may be wondering what a closed account on your credit report means for your credit.
The main impact of closing an account on your credit is the effect on your utilization ratio. By closing an account, you are reducing your total available credit limit, which could increase your overall utilization ratio if you have balances remaining on your other accounts.
Therefore, if you have balances on any of your other cards, you probably don’t want to close an account that is helping to keep your overall utilization down, as well as improving your ratio of low-utilization to high-utilization accounts.
On the other hand, if you pay down all your other credit cards to 0% utilization, you can safely close an account without impacting your credit utilization.
“Credit scoring models like FICO and VantageScore do indeed consider the age of your oldest account and the average age of your accounts when calculating your credit scores. However, closing an account does not remove its history — including its age — from your credit reports.
Not only will the history of a closed account remain on your credit reports, but credit scoring models will continue to consider the age of the account as well. And, even better, a closed account continues to age. So, if you closed a five-year-old credit card today… in 12 months it’s going to be a six-year-old credit card.”
Are Closed Accounts on Your Credit Report Bad?
Closed accounts on your credit report are not inherently a bad thing. In fact, they can often be a good thing, as we will elaborate on below.
Closed accounts on your credit report, unless they are derogatory, are not bad for your credit. In fact, they are probably giving your credit a boost.
However, derogatory closed accounts can definitely have a negative impact on one’s credit.
For example, if you had a credit card closed due to delinquency, meaning the creditor closed the account because you had stopped paying it, the account likely still has a balance owed.
Having a closed credit account with a balance on your credit report could really hurt your credit. According to some sources, closing a credit account removes its credit limit, so a credit card account closed with a balance would be considered maxed out or over-limit.
Credit utilization is a major influence on your credit score, so maxing out your utilization by having a credit card account closed with a balance could result in a big dip in your score.
However, other sources say that a closed account with a balance will be treated as an open account until the balance is paid off, at which point you can expect some damage to your score, especially if you have balances on your other credit cards.
The specific way that closed accounts are treated may depend on which credit score algorithm is used to calculate your score as well as other variables in your credit profile.
Should I Pay Off Closed Accounts on My Credit Report?
If your account was closed with a balance but remains in good standing, maintain its good standing by continuing to make payments until the account is paid off.
If your account was closed due to delinquency, the first thing to do is call your credit card issuer to check the status of the account. If the debt hasn’t been sold to a collections agency yet, you’ll want to start paying off the account immediately to prevent it from going to collections. You could end up with bad credit if you have a collection account on your file.
If the account is already in collections, however, whether or not you should pay it off is an entirely different question that depends on your individual situation.
See our article on collection accounts on your credit report for more information on how to handle collections.
Open vs. Closed Accounts on Credit Report
In the tradeline industry, we often get questions about whether closed accounts have an impact on one’s credit and, if so, what value they hold relative to open accounts.
It is possible to have a good credit score without having any open accounts. Photo by CafeCredit.com, CC 2.0.
This is an important question, because generally when you buy tradelines you are an active authorized user for two reporting cycles, and after you are removed from the account, it will begin to show as a closed account on your credit report.
Therefore, it is useful to know what impact the tradeline might have after it converts to a closed tradeline.
From what we have seen, closed accounts often can still be a very powerful influence on one’s credit score.
Remember, the age of a closed account still factors into your credit, and accounts continue to age even after they have been closed. Age and payment history go hand-in-hand and together make up 50% of a FICO score, and since closed accounts can still contribute to these factors, this implies that closed accounts can still have a strong effect on your credit.
However, closed accounts may have a diminishing impact over time, since credit scores tend to prioritize recent events.
Can You Have Good Credit With Only Closed Accounts?
It is possible to have a good credit score while only having closed accounts in one’s credit report. We have seen examples of people with credit scores in the 700’s who only had closed accounts in their credit file.
Can I Have Closed Accounts Removed From My Credit Report?
If you have closed accounts on your credit report that are not delinquent or hurting your credit, then there is no need to remove them. They may actually be helping your credit, even though they are closed.
Accounts that were closed in good standing should automatically fall off your credit report after 10 years, while delinquent closed accounts will fall off your credit report after 7 years.
How to Get Rid of Closed Accounts on Your Credit Report
If your credit card has been closed, you can try calling your credit card issuer to ask if the account can be reopened, but don’t wait too long.
If a closed account on your credit report is reporting inaccurately, then you can dispute it and have the credit bureaus update the account with the correct information or remove it.
Contact each credit bureau or check their websites for instructions on how to dispute accounts on your credit report.
If a Credit Card Is Closed, Can It Be Reopened?
In some cases, consumers may be able to reopen closed credit cards.
If your account was closed due to fraud or delinquency, banks typically do not allow these accounts to be reopened.
If it was closed voluntarily on your part or closed due to inactivity, however, you might have a chance to reopen the account if you don’t wait too long.
If you’re within the time window and your account is eligible to reopen, here’s how to reopen a closed credit card account:
Call the phone number provided on the back of your credit card (or if you don’t have the physical card anymore, look up the phone number for the customer service department for that card). Be ready to provide your personal information and answer security questions. Explain why you closed the account and why you are requesting to reopen it.
Some issuers may require a hard inquiry before they can approve your request, which could cause a small, temporary drop in your credit score.
If your bank doesn’t allow you to reopen the card, the next best solution might be to re-apply for the same card or apply for a new credit card altogether.
Take-Home Points About Closed Accounts
Accounts may be closed voluntarily by the consumer or closed by the creditor due to inactivity, fraudulent activity, or delinquency. Closed accounts are not necessarily bad and can even help your credit. Closing an account could affect your credit utilization. Closed accounts still contribute to your credit age and they continue to age even after they are closed. Closed accounts can still have a powerful impact on credit scores. Continue paying off accounts that were closed with balances to prevent them from going to collections. You can dispute closed accounts that are not reporting correctly. You may be able to reopen a closed credit card account depending on the circumstances.
Balance transfers are a somewhat controversial topic in the world of credit repair and debt payoff.
They can be a wonderful tool for helping consumers get out of credit card debt without being crushed by sky-high interest rates. On the other hand, if you’re not careful, they can also enable you to get yourself even deeper into debt than you were before.
If you’re interested in learning more about how balance transfers work, the pros and cons of balance transfers, and whether or not one could benefit your credit, then look no further: this article contains everything you need to know about balance transfers.
What Is a Balance Transfer?
A balance transfer is exactly what it sounds like: it is the process of transferring a balance from one credit card to another, typically one with a lower interest rate. By transferring your balance from a higher-interest card to a lower-interest card, you can save money on interest while paying down your debt.
Essentially, it’s kind of like using the lower-interest credit card to pay off the higher-interest card.
If you carry a credit card balance from time to time, you may have received from balance transfer offers in the mail from various credit card issuers, eager for you to apply for their credit card and transfer your debt to it. And you may have wondered, what’s in it for the banks? Why do they want to take on debt that you have with another bank?
A balance transfer is a way for a bank to get you—and your debt—to switch over to them from a competitor. To incentivize you to do this, they may offer a great deal on your balance transfer, such as 0% interest on your balance for 18 months.
Of course, the bank doesn’t make any money when you are not paying interest, so what are they gaining from this?
Firstly, the banks charge a small fee for each balance transfer (typically around 3% – 5%; more on this below). They also earn money on transaction fees when you swipe your card if you make purchases with the new card.
In addition, the bank is hoping that they will eventually be able to make money off of you in one or more of these scenarios:
You still have a balance left on the account when the promotional low-interest offer ends, and they can then begin to charge you a higher interest rate on the remaining balance. You make purchases with the card, which they can charge the normal interest rate interest on, and which makes it more likely that you will still have a balance at the end of the introductory period. You miss a payment for two months in a row and get a 60-day late on the account, which allows the bank to increase your interest rate to a high penalty APR of up to 29.99%.
If you make any of the above mistakes, then your account suddenly becomes very profitable for the bank instead of interest-free credit for you.
If you miss a payment for 60 days, your credit card issuer can bump up the APR from 0% to a high penalty rate.
The banks know that a certain percentage of customers will ultimately end up generating profit for them, which means that offering balance transfers is an effective marketing tool even if some customers “beat the system” by paying off their entire balance without paying a cent of interest.
If you’re smart about making a plan to avoid potential pitfalls, you may be able to save yourself a lot of money and pay down your debt faster by using a balance transfer to your advantage.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is a credit card that has terms that were specifically designed to encourage customers to transfer a balance to the card. It can still be used for purchases, just like a normal credit card (although that’s usually not a good idea, as we’ll explain later on), but its primary purpose is for balance transfers.
What Is a Good Balance Transfer Credit Card?
A good balance transfer credit card is any card that offers a low balance transfer fee and an introductory period during which there is a low APR or, ideally, no interest charged at all.
In addition, in the interest of minimizing costs, you’ll probably want to look for cards that do not charge an annual fee.
To summarize, the perfect balance transfer credit card would ideally have the following three things:
0% introductory APR for at least 12 – 18 months 0% introductory balance transfer fee No annual fee
However, it is more typical to find cards that have a combination of two out of the three. For example, you might apply for a balance transfer card that has a 0% APR for 18 months and no annual fee but a 3% balance transfer fee.
Some balance transfer credit cards may also double as reward cards that offer cash back or rewards points on purchases. While this might be a nice feature to have down the road, it’s best to avoid making purchases on your new balance transfer card while you pay off the balance. The promotional balance transfer APR usually doesn’t apply to purchases, which means they will begin to accumulate interest at the regular rate immediately.
Although some balance transfer credit cards may also offer cash back rewards, it’s best to avoid using them for purchases until you have finished paying off your balance.
Plus, the credit card company can choose to apply your payments first to the balance you transferred, instead of new purchases, so it’s possible that interest on those charges could keep racking up until you are finished paying off your entire balance transfer.
Which Balance Transfer Card is Best?
For specific credit cards that are good for balance transfers, you can browse online resources, such as Credit Karma’s list of the best balance transfer cards. Creditcards.com and NerdWallet have similar roundups of their favorite balance transfer cards.
Compare and contrast the terms for each card you are interested in to find the best balance transfer deal. Many resources also estimate what credit score range you may need in order to get approved for different cards.
Using an Existing Card for a Balance Transfer
You don’t necessarily have to apply for a new credit card in order to transfer a balance—you may already have a credit card that you could use for a balance transfer. Sometimes banks will offer balance transfer promotions with 0% APR to their existing customers, so keep an eye out for any balance transfer deals from your credit card issuers.
You could even consider potentially transferring a balance to another credit card without any sort of promotional offer if it already has a significantly lower interest rate.
How Does a Balance Transfer Work?
When you apply for a new balance transfer credit card or accept a promotional balance transfer offer with an existing card, you provide information about the account you want to transfer a balance from.
Alternatively, if you are applying for a new card, you could wait and see what credit limit you are approved for first, and then contact the issuer of your new card to set up a balance transfer.
Once you have been approved for the new card (if applicable) and submitted your balance transfer information, the issuer of the card you are transferring a balance to will contact the other bank in order to pay your balance.
It may take a few weeks for the transfer to be completed. In the meantime, you will need to keep making payments on your existing account as usual so that you don’t miss a payment while waiting for the balance to be transferred. Once the transfer has gone through, then you can start making payments toward the new account.
What Is a Balance Transfer Fee?
Most credit card issuers will charge a fee for conducting a balance transfer. This fee is a certain percentage of the balance you are transferring. Typically, balance transfer fees range from 3% to 5%. They may also have a minimum fee of around $5 to $10 that is assessed for smaller balances.
For example, if you want to transfer $5,000 and the balance transfer fee is 5%, then you would be charged $250 for the balance transfer ($5,000 x 0.05 = $250).
Your credit card issuer may supply you with balance transfer checks, which you can use to pay off the balance on your higher-interest credit card.
You pay the balance transfer fee to the bank that provides the credit card that you are transferring the balance to. The bank will simply add the fee to your balance. In the above example, when your balance transfer is complete, you would end up with a balance of $5,250 on the account.
What Is a Balance Transfer Check?
If you regularly carry a balance on your credit cards from month to month, then you may have seen balance transfer checks before. Credit card issuers often send them in the mail along with a promotional balance transfer offer.
Balance transfer checks are checks that the issuer of your balance transfer credit card may supply to you which you can then use to pay off the balance that you want to transfer from another card. To do so, you would simply make out the check to the credit card company you want to pay for the amount you want to transfer.
Some banks may allow you to write the checks to yourself and deposit the money directly into your bank account, which you can then use to pay another credit card company. If this option is available to you, before rushing out and cashing the checks in your name, first check to see whether the credit card issuer will consider it a cash advance, in which case you would likely get charged a cash advance fee as well as a higher interest rate on the balance.
Can You Transfer a Balance Online?
While using balance transfer checks is one way to complete a balance transfer, it is often easier and faster to complete the process online or over the phone.
If you apply for a balance transfer card online, it is likely that you will have the chance to provide the account information for the account you’d like to transfer a balance from so that your new credit card company can make the payment for you.
You can request a balance transfer online as part of your application for a new balance transfer credit card.
Alternatively, you can call your new credit card issuer and provide the necessary information to complete the balance transfer over the phone.
Can You Transfer a Balance Between Products From the Same Bank?
You can usually transfer a balance between most banks, and you can sometimes even transfer other types of balances, such as installment loan debt, to a credit card.
Typically, however, credit card issuers will not allow you to transfer balances between different credit cards you have with the same issuer, including branded cards that are issued by the same bank.
For example, if you have two different credit cards with Chase, you likely wouldn’t be able to transfer a balance from one to the other. However, you could transfer your balance from your Chase card to, say, a Bank of America or Discover credit card.
The reason for this is that the banks are trying to use balance transfers as an incentive to gain new customers, which equate to new sources of revenue. An existing customer transferring a balance between two cards with the same bank doesn’t create any profit for the bank, so they have nothing to gain by offering balance transfers between their own credit cards held by current customers.
What Types of Debt Can You Transfer to a Balance Transfer Card?
Some credit card issuers may allow you to transfer other types of debt, such as installment loans.
Other types of debt that you may be able to transfer to a balance transfer credit card include student loans, personal loans, home equity loans, and auto loans. NerdWallet has a detailed list of the types of transfers that are accepted by several major credit card issuers.
Since installment loans typically have significantly lower interest rates than credit cards, it usually only makes sense to transfer installment debt to a credit card if you are confident in your ability to pay it off while you still have 0% interest on balance transfers.
What Is a Balance Transfer Credit Limit?
When you get approved for a balance transfer credit card, the card issuer will assign you a credit limit, which is the maximum amount of credit that you can carry on the card. Often, the amount that is available for balance transfers may either be the same as your total credit limit, meaning you can use your entire credit limit for balance transfers.
Other times, the credit card company may impose a separate balance transfer credit limit, which is the maximum amount of credit that you can use for balance transfers.
The balance transfer credit limit is not an additional amount that can be added on top of the total credit limit; rather, it is a specific portion of your total credit limit that can be used for transfers.
For example, if you get approved for a card that has a $5000 credit limit and a $4,000 credit limit, that means you can use $4,000 of the $5,000 of available credit for balance transfers. If you use the full balance transfer credit limit, after that, there will be $1,000 of your credit limit remaining, which will only be available for purchases.
It’s important to remember that balance transfer fees count toward your credit limit, so unless you find a card with no balance transfer fees, you won’t be able to transfer the full amount of your credit limit.
Therefore, you should calculate the total amount of the fees you will be charged before transferring to make sure you are staying below your credit limit. As an example, if your balance transfer credit limit is $10,000 and the balance transfer fee is 3%, that means you should transfer a balance of no more than $9,700 to leave room in your credit limit for the $300 fee ($10,000 x 0.03 = $300).
Although there is no hard limit on how many balance transfers you can do, it’s usually recommended to transfer a balance no more than once or twice.
How Many Balance Transfers Can You Do?
When it comes to the number of balance transfers allowed on one card, it depends on the policy of your balance transfer card issuer. For example, they may limit you to a maximum of three balance transfers when applying for the card, in addition to keeping the total amount transferred under your balance transfer credit limit.
More generally, in theory, you could do as many balance transfers as you like. In reality, of course, transferring a balance several times isn’t the best idea.
Having a lot of balance transfers on your record might lead creditors to assume that you don’t intend to or aren’t able to pay back your credit card debt quickly and that you are just transferring your debt between different credit cards to avoid paying interest, according to Discover.
Eventually, creditors might stop approving you for balance transfer cards, leaving you with a high interest rate when your promotional APR expires.
Plus, transferring a balance multiple times before paying it off might make you feel like you are making progress, when you are really just moving your debt around from one card to another without implementing an effective plan to pay it off.
Instead of falling into a cycle of endless balance transfers, which won’t help you pay off your debt, make sure you have stopped the cycle of spending that may have gotten you into debt in the first place and ask yourself whether you can create a plan to feasibly pay off your debt after your first balance transfer.
Will a Balance Transfer Close My Account?
If you are wondering whether the account that you transferred a balance out of will be closed after the balance transfer is complete, rest assured that it will not. The only thing that will happen is the balance of that account will decrease by the amount of the transfer.
Closing your credit card account is up to you. If you would like to close your account once there is no longer a balance on it, then you can contact your credit card issuer and request for them to close your account. You may want to close the account if it has an annual fee or if you think that having no balance on the account might encourage you to max it out again.
A balance transfer will not automatically close your old account. In fact, you should keep the old card open and in good standing so that it can help your credit utilization ratio.
However, unless you have a strong reason to close the account, such as the examples above, then it is typically recommended that you leave the account open.
As you may know from our article on how closed accounts affect your credit, the main reason that keeping accounts open is preferable is that they can only help your revolving credit utilization ratio when they are open. By closing an account, you take away the credit limit of that account from your utilization ratio, thus increasing your overall credit utilization.
So if you want to help out your credit score by maintaining a low credit utilization ratio, consider keeping the account open after the balance transfer. You don’t have to spend a lot on the card to keep it open.
Instead, you can charge something small every few months or use it for a recurring subscription service charge and simply pay it off when the bill is due. Even better, set up automatic bill pay so you don’t have to worry about remembering to pay the bill, which is a great credit hack!
How Much Does a Balance Transfer Cost?
To determine the cost of a balance transfer, all you have to do is simply multiply the amount of debt that you want to transfer by the balance transfer fee that your credit card issuer will charge.
For example, if you plan to transfer a balance of $8,000 and the balance transfer fee that will be assessed is 5%, then the fee associated with your balance transfer will cost you $400 ($8,000 x 0.05 = $400).
This amount would be added to the balance of the account that you are transferring to for a total new balance of $8,400.
However, the cost of a balance transfer may not be limited to the balance transfer fee. It is important to consider the interest that will be charged on your balance transfer as well.
If you can take advantage of a promotional 0% interest rate, then, obviously, you do not have to worry about interest charges as long as you pay off the balance by the end of the promotional period.
On the other hand, if you think you do not think that you will have finished paying off the balance by the end of the promotional period, then you should take into account the interest that will be applied once the time is up.
Some balance transfer deals may offer a low interest rate for a longer period of time rather than a 0% APR. If this is the case for you, then you might want to try out a credit card repayment calculator, such as this one from Credit Karma, to help you determine how much you could end up paying in interest.
It’s important to do the math before committing to a balance transfer offer in order to ensure it’s a smart move financially.
Will a Balance Transfer Save You Money?
A balance transfer may very well save you a significant amount of money, but it’s not necessarily a guarantee. As with most things in the world of credit, the potential costs and benefits depend on your individual situation and must be considered on a case-by-case basis.
If you are a typical consumer who has a few thousand dollars of credit card debt, then most of the time, it is probably fair to assume that a balance transfer could save you money if done correctly. That’s because many credit cards today have interest rates of 15% – 20% and often even higher, up to nearly 25%!
If you are paying that much in interest on any significant amount of credit card debt, then you could almost certainly save money by finding a balance transfer deal with a low interest rate and a low balance transfer fee.
However, it’s still important to crunch the numbers to make sure that a balance transfer is an option that makes sense for you. In order to easily determine whether a balance transfer could save you some money, you can use a balance transfer calculator.
First, find out how much money it would take to pay off your debt without doing a balance transfer by entering the numbers that are applicable to your current credit card repayment scenario (i.e. the balance owed and interest rate of your current credit card and your expected monthly payment or ideal payoff time). Then, enter the figures that would apply if you were to transfer your balance to a different card. For example, you could plug in the interest rate from a promotional balance transfer offer that you have been pre-qualified for. Also, don’t forget to add on the balance transfer fee to your balance owed in this scenario, which you can easily figure out as we described in the above section. Once you’ve done that, the repayment calculator can tell you how much money you would end up paying toward your debt if you were to transfer your balance. Finally, compare the two results that you got in step 1 and step 2. If the number that you got in step 1 (your current repayment scenario) is lower than the number from step 2 (the balance transfer scenario), then that means you would pay less by staying the course with the repayment strategy you have now. If instead, the amount you calculated in step 2 is lower than the amount you calculated in step 1, then that indicates that a balance transfer with those parameters could save you money!
Comparing balance transfer offers and reading the fine print can help you decide whether a balance transfer will save you money in the end and which balance transfer card is best for you.
Beware of Retroactive Interest Rate Increases
One more important thing to consider when assessing the costs and benefits of a balance transfer is whether you will be charged retroactive interest if you cannot pay off the full balance by the end of the introductory low-interest period.
A retroactive interest rate increase means that you can be charged a higher interest rate on the balance you already transferred to the account in the past, back when you had a lower interest rate.
In other words, not only will you be charged interest on the balance that has not yet been paid, but you will also have to pay the higher interest rate “backdated” to the date you first transferred the balance—and on the original balance amount.
While it is rare for most major credit card issuers to charge retroactive interest, also called deferred interest, many retail store cards and some co-branded credit cards often do.
Although the Credit Card Accountability Responsibility and Disclosure Act (also known as the CARD Act) of 2009 banned banks from arbitrarily increasing credit card interest rates, retroactive rate hikes are still allowed if the contract you signed with your bank permits it.
Make sure to check the terms of your balance transfer card carefully so that you don’t get hit with a ton of surprise interest charges down the road. In addition, be aware that the banks are legally required to give you a minimum of six months at the introductory rate before they are allowed to ramp up the interest rate on your account.
Is a Balance Transfer Good for Your Credit?
In most situations, it is likely that a balance transfer can be beneficial to your credit, especially if you go the route of =opening a new credit card to which you can transfer your balance.
Opening a New Balance Transfer Credit Card
If you open a new balance transfer credit card, this can help your credit by adding available credit to your credit profile and thereby decreasing your overall utilization rate.
Opening a new account does have some drawbacks for your credit, such as the small negative impact of the hard inquiry and the reduction in your average age of accounts. These factors may hurt your score slightly. However, the benefit to your credit utilization will likely outweigh these factors, especially over time, as the impact of the inquiry diminishes and as you keep paying down your balance.
Transferring a Balance Between Existing Cards
The other balance transfer scenario is when you do not open a new balance transfer credit card, but rather, you transfer a balance between credit cards that you already own.
A balance transfer could potentially help both your individual and overall credit utilization ratios.Photo by Marco Verch, CC 2.0.
In this case, there is not as much potential to boost your credit score because you are not adding any additional available credit, which means your overall utilization ratio will stay the same. However, you may still be able to benefit by manipulating your individual utilization ratios.
If you can use a balance transfer to adjust your individual utilization ratios to more ideal levels, then this could improve your credit score. Let’s consider an example to help illustrate how this would work.
Example: Credit Card A has a $1,000 credit limit and is maxed out with a $1,000 balance, so it has an individual utilization ratio of 100%. Credit Card B has a $5,000 limit and no balance, so its utilization ratio is 0%.
What happens if we transfer the $1,000 balance from Card A to Card B?
Card A will then have a $0 balance and 0% utilization ratio, while Card B will then have a $1,000 balance and a 20% utilization ratio ($1,000 balance / $5,000 credit limit x 100% = 20% utilization).
Before the balance transfer, one of the accounts had a $0 balance and the other was completely maxed out. After the balance transfer, one account again has a $0 balance, but the other is only at 20% utilization, which is certainly a lot better than 100% utilization!
This example shows how it’s possible to use a balance transfer to improve the credit utilization portion of your credit score without actually changing the amount of debt you have.
If you’re considering trying this strategy, use our tradeline calculator to help you calculate both your individual and overall utilization ratios so that you can decide whether a balance transfer could help your credit utilization.
Do You Need Good Credit to Qualify for a Balance Transfer Credit Card?
Generally, good or excellent credit is needed in order to qualify for the best balance transfer offers, such as a long 0% APR introductory period and/or no balance transfer fees.
Generally, the best balance transfer offers are reserved for consumers with good or excellent credit.
According to NerdWallet, consumers who have good credit (i.e. a 690 or higher FICO score) might be able to qualify for a balance transfer card with an introductory 0% APR for a period of 12 to 18 months. Some cards may offer even longer introductory periods of up to 21 months.
In addition to having a high credit score, credit card issuers also want to see that you’re not already maxed out on all of your credit cards, which indicates to them that you are desperate for credit and may not be able to pay back all of your debt obligations.
If you have fair credit (580 – 669 FICO score), then it will be more difficult to get a good balance transfer card. You may be able to qualify for a balance card transfer that doesn’t have all the perks of a balance transfer card for excellent credit. For example, it may have a shorter introductory period, a higher APR, or a higher balance transfer fee.
In this case, it’s even more important to do the math before going through with your balance transfer in order to make sure it will still save you money overall despite the fees.
Consumers who have a bad credit score are unlikely to qualify for a balance transfer credit card. Lenders don’t want to take on your debt if they think you are not likely to pay it back, which is what a low credit score indicates. However, there are other things you can do to reduce your credit card debt even if you have bad credit.
What to Do if You Can’t Get a Balance Transfer Card
If you’re not able to get approved for a new balance transfer credit card, don’t give up hope on paying off your debt. There are still a few options that may be a good fit for you.
Transfer Your Balance to a Card You Already Have
Check your existing roster of credit cards and see if any of them 1) have a lower interest rate than what you’re currently paying on your balance and 2) have enough available credit for a balance transfer. If the answer to both questions is yes, then it might be worth transferring your balance to the lower-interest card. However, you should always run the numbers first to be sure.
Get a Secured Balance Transfer Credit Card
Although the offers won’t be as appealing as those for excellent credit, it may be possible to qualify for a secured credit card with a lower introductory balance transfer APR than the rate you’re paying now. Keep in mind that you will need to have some cash on hand for the security deposit required for a secured credit card.
Having someone with good credit cosign with you may improve your chances of getting a better balance transfer offer.
Get a Co-Signer to Boost Your Chances of Approval
As you may recall from our article about “The Fastest Ways to Build Credit,” getting a co-signer with good credit can help you get approved for credit that you might have trouble qualifying for on your own.
If you can find a co-signer willing to accept responsibility for the debt if you cannot repay it, then you may have better chances of getting approved for a decent balance transfer card.
Get a Personal Loan to Pay Off Your Credit Card Debt
Another option for paying down debt with fair credit or bad credit is to apply for a personal loan and use the funds to pay off your credit cards, which is known as a debt consolidation loan. A debt consolidation loan allows you to combine all of your debt into one loan with one monthly payment and a lower interest rate.
However, personal loans for bad credit and fair credit can come with high interest rates and fees, so be sure to read the terms carefully before committing and steer clear of predatory lenders. In addition, watch out for loans that have prepayment penalties, especially if you know you’ll want to try to pay off your loan early.
Ask Your Credit Card Issuer for a Better Interest Rate
Don’t be afraid to call your credit card issuer and ask for a lower interest rate. Most people who request a better rate are successful!
One of the easiest credit hacks that can help save you money on interest and pay down your credit card debt faster is to call your credit card issuer and simply ask them for a lower interest rate. Make your case by explaining why you’ve been a good customer and why you feel that they should lower your rate.
Most people who do this are successful in getting a lower interest rate, so why not give it a try? One phone call could save you a significant amount of money on interest charges and help reduce your credit card debt burden.
Seek Credit Counseling and Create a Debt Management Plan
In extreme cases of credit card debt, it may be necessary to consider working with a credit counseling organization to create a debt management plan. With this option, a credit counselor can help you outline a plan to repay your debt and negotiate with your creditors on your behalf to lower your monthly payments and interest rate.
Keep Building Up Your Credit Score Until You Can Qualify for a Balance Transfer Card
Hopefully, you can use one or more of the above strategies to help make a dent in your debt repayment, but it’s also important to keep focusing on improving your credit over time. With time, patience, and good credit management, you may be able to qualify for a good balance transfer card in the future.
A balance transfer is a good idea when you have determined that it will save you money in the long term and when you have a plan to pay off your balance in the time allotted.
Generally, balance transfers may be a viable option for those with less than $15,000 in debt who can also afford to repay the balance in 21 months or fewer, according to NerdWallet.
On the other hand, a balance transfer may not make sense if you don’t have very much debt or if the interest rate you are currently paying is already fairly low. In these cases, it may not be worth paying the balance transfer fee just to save a little bit of money on interest.
Another important step in deciding whether a balance transfer would be a smart financial move for you is to think about your own psychology and behavior patterns. If you think that having extra credit available to you as a result of a balance transfer may tempt you to spend even more on your credit cards, then a balance transfer may ultimately do more harm than good.
How to Make Sure a Balance Transfer Will Work for You
If you’ve decided that a balance transfer might be a good debt repayment strategy for you, follow these tips to avoid paying interest and ensure that your balance transfer actually saves money in the end.
Choose the right balance transfer credit card.
Choose a card that’s going to be a good fit for you. Look for one with no annual fee, a long 0% APR introductory period, and low balance transfer fees. Read the terms of the card closely and watch out for contracts that allow for retroactive or deferred interest charges.
Crunch the numbers first.
Instead of just assuming a balance transfer is always a good idea, you need to do the math first to ensure that you’ll actually come out ahead in the end.
Don’t miss any payments.
Becoming 60 days late on a payment could sabotage your promotional interest rate and land you with a high penalty APR instead. Not only that, but you would get a derogatory mark on your credit report. Set up automatic bill pay on your account so that you never miss a payment.
Make a plan to pay off your balance before the introductory APR expires.
The point of a balance transfer is to tackle your debt faster while saving on interest, but in order to do so, you need to be able to pay off your balance before the end of the 0% APR introductory period. Make a plan to finish paying off your debt before your interest rate goes up and do your best to stick to it, even if your cash flow is a little tight for a while.
Don’t spend on the balance transfer credit card—or your old card.
Although it might be tempting to use your new balance transfer card for purchases or to run up the balance on your old card again after clearing the balance from it, this is just going to make it even harder for you to get out of debt.
In fact, having extra available credit from opening a new credit card means you could potentially get yourself into an even bigger mess than you were in before.
If you can’t pay off your balance by the end of the introductory period, consider whether you might want to do another balance transfer to a different card.
If you’re going to use a balance transfer as a way to help you pay off debt, then you first need to make sure you have addressed the spending habits that got you into debt in the first place, or the strategy could backfire and end up costing you more instead of saving you money.
If you don’t finish paying off your balance by the end of the promotional period, consider transferring your balance again to another 0% interest card.
Even the perfect plan can go awry when something unexpected happens, such as if you lose your job and can’t pay as much toward your debt as you would like. In other cases, your balance may simply be too large to realistically pay off during the introductory period.
Either way, if for some reason you aren’t able to finish paying off your balance by the end of the introductory promotional offer, then you may want to consider taking advantage of another 0% APR balance transfer offer. This will allow you to have some additional time to pay down your balance without accumulating interest.
Conclusion: Is a Balance Transfer Worth It?
A balance transfer can be a valuable option for those in the process of paying down high-interest debt. It could help you consolidate your payments, save money on interest, and chip away at your debt faster.
However, it’s not an instant cure-all for credit card debt.
You need to change the behaviors that got you into debt before looking into a balance transfer, otherwise, you might end up right back where you started, or even worse off than you were before.
If you do choose to do a balance transfer, it’s imperative to read the fine print, be aware of the terms of your balance transfer offer, and have a realistic strategy in place for paying off the balance.
For a quick summary of the main points of this article, check out NerdWallet’s video about balance transfers below.