Most of us have heard time and time again to shy away from opening new credit card accounts because it will destroy your credit rating. But as with most things, there is a right way with good reasons to open an additional credit card, and a wrong way that could lead to financial disaster. Opening a new credit card for the right reasons can actually save you money and improve your credit rating in the end.
Credit Card Shopping
Shopping around for credit cards with balance transfer options is a great way to improve your credit rating and overall financial outlook. The cards that will not help your financial situation are retailer cards, including grocery store specific versions and gas cards. It’s hard to turn down the 15% or more savings that retailers often offer on your first purchase. However, these cards are limited only to the retailer and do not provide much overall value to your financial outlook outside of encouraging you to do more shopping. They also tent to have higher interest rates, making them an unwise choice if you tend to carry a balance.
A balance transfer is an option provided by credit card companies for you to move the balance you carry on one credit card over to another credit card. This can facilitate a number of things such as debt consolidation, reduced or eliminated monthly finance fees and increasing your debt to available credit ratio.
Balance Transfer Basics
Before you consider using a balance transfer option, consider why you are planning to use the option.
- Are you transferring balances from one credit card to another because you don’t have enough money to pay your current monthly bill?
- Are you transferring a balance to a card with an interest rate that is the same or higher than the card holding the balance?
- Does the card you are transferring the balance to require any annual fees?
- Is the interest rate on the new card an introductory rate and will it end within 6 months?
If you answered yes to any of these questions, you are likely only digging yourself a bigger financial hole. It is important to evaluate all fees and interest rate information when opening up a new card for any purpose. It is also important to understand if you are getting in over your head with payments.
Opening a New Credit Card for the Right Reasons
If you have done your homework and know the financial in’s and out’s of your newly minted credit card, consider the following options for maximizing this potential benefit to your credit history:
- Only transfer the amount of debt that is equal to 50% of a card’s available balance. Even if you are paying a higher interest rate on a portion of your credit debt, the reduction in your debt to available credit ratio will improve your overall credit score.
- If you have a card that has a high interest rate and no reward programs or additional benefits, transferring the balance to a card with these promotional programs and a reduced interest rate could also be an opportunity. However, do not close your old card. The length of credit history is a key piece of your credit score as well.
- Transferring your balance to a card with a low introductory interest rate and paying off the balance prior to the revised fee schedule takes effect, is a way to drive your debt reduction motivation as well as being financially savvy at managing debt that might have been unavoidable.
Balance transfers can be a great opportunity for improving your credit rating and reducing your debt to a more manageable monthly payment. However, it is critical to read the fine print. You should also be sure you are not resorting to balance transferring in order to help make your monthly financial ends meet as you will likely be falling even further into debt while limiting your means to ever come out from beneath it.
Sheryl Platte is a freelance writer based in the Seattle, WA area. With ten years of business and industry experience, Sheryl focuses her writing on strategy and consumer information writing.
