Not so good karma for your credit?

I just received an email from a popular credit reporting service suggesting that I open new accounts.

When you click the big yellow button, it takes you to various credit cards that are offering reduced interest for specific periods of time.

Is it financially savvy to pay less interest on your credit cards? YES.

Will it impact your credit scores for the worse? YES

Transferring a balance from a higher interest rate to a low to no interest credit card does make financial sense…however, it will most likely cause your credit score to tank. This is because you are causing a double whammy to your credit scores:

1. Paying off an older established debt. Credit scoring modules prefer older established credit over new. When you pay off, no longer use or close an older account, you end up losing the points for good behavior that was established over time. Note: even if you just pay off and leave the account open – if you don’t use it every month (even for a small purchase), you’ll probably lose the benefit of a better score.
2. Opening a new debt. As I mentioned previously, credit scoring prefers established debts over new debts. Credit scoring does not care that you’re trading in a interest rate of 25% for 0%. It just factors the age of the debts. Open a new debt, and your scores will most likely be impacted.
3. Debt loan to value. If you are consolidating debts to one account and that account winds up exceeding 50% of the credit line limit, your score will get whammo’d. Credit scoring modules favor loan to values under 30% of the total credit line. For example, if your new credit card with the shiny low interest rate has a credit limit of $10,000 and your combined debts that you transferred total $5,001, your score will probably be negatively impacted.

Now, if you are not planning on buying a home or refinancing a home or you don’t care about your credit score, then none of this may apply to you. It’s unfortunate that credit scoring doesn’t always mirror or reward financially good decisions.

If you are considering buying or refinancing a home anywhere in Washington state, I am happy to help you. Click here for a no-hassle mortgage rate quote.