Can Rearranging My Debt Boost My Credit Score?

A reader, Eric, wanted to know if it would be smart to move some of his debt from credit cards with high balances to other cards that offer 0% financing for balance transfers. His goal is to qualify for low interest rates when he buys a car, and he wants to maximize his score. Here’s the situation as he describes it:

I currently have 16 credit card accounts with $95,000 in combined credit lines. Out of 16 cards, 14 have a zero balance. The other two have high balance-to-limit ratios of around 75%. Would it make sense for me to do a balance transfer and spread the debt over several cards, incurring the balance transfer fees? Currently the two cards with balances have zero interest for 18 months. I expect to pay off the debt before that time period. I’m just trying to gauge the impact on my credit score for having two cards close to being maxed out.

He told us that the money owed on the two cards amounts to 14% of his total credit limit. Balance transfer fees would likely amount to about 3% of the amount transferred, so what Eric really has is a math problem: Will the money spent to try to raise his credit score be more than the additional amount he’ll pay in interest to buy the car? Of course, the other question is whether rearranging his debt would raise his credit score to the level he needs.

We asked credit expert Barry Paperno, and he agreed that Eric needs to first do the math. He also suggested that Eric (who has been checking his free scores on Credit.com) also take a look at his FICO scores, because a car lender is likely to use a version of FICO scores when evaluating his application. Though, keep in mind that there are many variations of FICO scores and so it’s unlikely he’ll see the exact score the lender will use. Nevertheless, seeing other variations can still give him an idea of what range he falls within. Second, he should find out from lenders or auto dealers what scores are required for loans at the lowest interest rates. If Eric’s scores are already well within the range required, he needn’t worry about trying to boost his scores by rearranging debts.

If his scores are too low to qualify for decent rates, he can check the reason codes that come with his credit scores. If it appears his high balances on those two cards are keeping his scores down, then he might want to look into moving his debts around. But before he does that, he’ll need to get out his calculator. First, he’ll need to calculate the difference he’ll pay in interest with the higher-rate versus lower-rate loan. Then he has to calculate balance transfer fees and any interest he’ll pay. (It’s unlikely that his 14 remaining cards all have 0% interest offers, Paperno noted). Finally, after taking the costs of the balance transfers into consideration, he will see if he saves a substantial amount of money by going for the higher score.

Not a Simple Call

Even then, the decision is hardly a slam-dunk. “Before considering balance transfers . . . he needs to be aware that there’s no way to know how much balance transferring it will take to raise the scores to where they need to be — or if raising the scores is even possible via balance transfers — until: a) the transfers have been completed, b) he’s waited at least 30-60 days for the new balances to appear on his credit reports, and then c) he has obtained newly updated scores,” Paperno said in an email.

“If he does all of this, and he is very lucky, his scores may have improved enough to land the lower auto loan rate and save the difference between the higher rate and the cost of the transfer fees and interest,” he said.

Would Paperno do it? Not a chance. “I’m exhausted just thinking about it, and would not recommend going the balance transfer route, as its (remotely) possible benefits are far outweighed by the risk of paying for the balance transfers … and ending up with scores that still aren’t going to get a better-enough auto loan rate to have made it all worth it,” he said.

The simpler and safer way for Eric to raise his score is the old-fashioned one — by paying his bills on time and by keeping his credit utilization at less than 25% (less than 10% is even better). If he can wait to buy a new car, it’s possible he can qualify for a better loan down the road. It would also be a good idea to check his free annual credit reports to make sure all of the information there is accurate, because credit scores are calculated from information in credit reports. If he finds inaccurate information, he can dispute it. And, since he has so many cards, he would be wise to be sure he occasionally charges at least something, however small, on each, so that the issuers don’t close the accounts, lowering his available credit (and possibly his credit scores).