"Do you know if this balance transfer will have a negative impact on credit rating?"Since credit scores are a complex subject, I thought I'd write a seperate post to answer that question. I will only discuss the impact of using a balance transfer for credit card arbitrage. For more general information on credit scores, The Financial Blogger has a nice series of articles.
The credit score takes into account a number of things when looking at credit cards:
- How many credit cards do you have? Obviously, opening a new credit card account increases this. This is not necessarily a bad thing, if you don't have many of them. This raised my number of cards from 3 to 4, which should not be negative considering my credit history.
- What is the average age of your accounts? Opening a new account, however, will "dilute" your existing credit card accounts, so the impact will be negative. I've held two of my credit cards for a long time, while the third was recent. So I've effectively cut my average by half. I'm not sure how this will impact my score.
- What is the total credit limit accross all account? This is another area where opening a new account has an impact. However, this is not necessarily negative. Before opening my new card, I had kept my total limit quite low (about $11,000), so the $11,000 limit they granted me of this card raised my total to $22,000. I think this is still reasonable, if a bit high for my personal tastes.
- What percentage of your total limit are you using? That is the area where you can take the biggest hit on your credit score when using a balance transfer for arbitrage. If you open a new card and max it out right away, you will increase your utilization ratio substancially. Since this is an experiment, I kept the amount drawn from the new card low, at $5,000 out of a limit of $11,000 -- which is about 45% of the credit limit. I previously had a 50% utilization ratio, so it basically remained the same.
Now, I still expect to take a hit on my credit score. But since the next time I need to negociate a loan is about 18 months away (when I renew my mortgage), it will have time to recover.