This is a guest post from Andy Jolls, a former FICO executive and founder of VideoCreditScore. If you like what you see here, please consider checking out his videos and/or subscribing to his RSS feed.
A few years ago, a friend of mine was engaged in 0% credit card hopping. She had accumulated $20, 000+ in credit card debt after graduate school and was constantly opening up a new card to avoid interest charges. The logic: people see these 0% credit card offers and think “Wow, I can use those to make a dent in my debt.”
This line of thinking should, however, lead to two questions:
- If credit card issuers are making these offers so often, how can they be making money?
- Are there any negative impacts of card hopping, such as damage to your credit score?
The 0% reality
The truth is that most people weren’t careful enough to really take advantage of the “free loan” offered by 0% credit cards. The reality is that most folks transfer their balances and then see their card balances stay about the same, or even grow.
This is probably because people keep putting off their payments knowing they can hop to the next 0% offer. While I could dig for data to support this view, I’ll just stick with some basic logic…
Credit cards essentially offer 30 day “free” loans, and yet they generate billions in interest payments to card issuers every year. It thus stands to reason that a six month 0% offer could easily lead to a profitable business — and it often does.
Effects on your credit score
On the credit score side, the impact of card hopping is probably unknown to many “hoppers.” Credit card hopping creates several different issues. First, by opening so many credit cards, you are impacting the inquiries piece of the credit factors pie. Lots of inquiries means lots of risk and thus a lower credit score.
Second, if you are opening these cards, doing a transfer, and then closing the cards, you are never building aggregate available credit. You could have had 20 credit cards in your life, yet only have $1000 worth of available credit at any given time. People with great credit scores often have total credit limits in excess of $20, 000 meaning that you’re usually using just a small fraction of their available credit. Since credit utilization accounts for 30% of your credit score, this can have a big impact.
Finally, the credit history portion of your score will be damaged, as it favors people who have had a few credit cards for years and years as opposed to consumers with lots of cards that have only been open for six months. This is why older people often have better credit.
Ask for a better rate
Another possibility is to use a 0% balance transfer offer as leverage against your current card issuers. Go ahead and contact your creditors and tell them that you have an offer to switch to a 0% card and that you want your interest rate lowered. You may be able to negotiate that 24% rate down significantly.
The 0% landscape
So… If these 0% credit card offers are so profitable, why have they begun to dry up? Well, the current economic climate has transformed consumers who struggle to pay off their debts into defaulters, cutting into profit margings. Thus, credit card issuers have tightened up and 0% cards have gotten harder to find — for now.
Eventually, however, the economy will recover. When it does, zero percent offers will once again become commonplace. As tempting as these offers might be, you should resist them unless you have a firm repayment plan in place. While getting out of debt is an admirable goal, you won’t make any progress without a plan.