Dear Liz: Would it hurt our credit scores if my husband and I transfer credit card balances to interest-free cards? This would save us more than $200 a month in interest. We’ve done this twice before but are concerned about hurting our scores.
Answer: Using balance transfer offers can dramatically reduce your interest costs. But this maneuver does have risks, with potential credit score damage just one of them.
Every time you open a new account, you risk a small ding to your credit score. Transferring a balance from a high-limit account to a lower-limit one can also cause your scores to drop. The damage can be temporary if you diligently pay down your balance, but many people who use low-rate balance transfer offers move their debt around rather than paying it off.
You need to know that the tune for this game of musical chairs may be about to end. Many credit card experts believe low-rate balance transfer offers will become much scarcer as we draw closer to the implementation date of the new credit card reform law in February 2010.
Indeed, most balance transfer offers are already less generous than they were a few years ago. Although people with excellent credit still get low-rate balance transfer deals, the low rates don’t last as long and are almost always accompanied by 3 percent to 4 percent balance transfer fees that are no longer capped.
By all means, take advantage of this offer if it makes financial sense. But don’t expect to be able to transfer your balance to another cheap deal once the no-interest time period expires. Use your low rate as an impetus to pay off this debt as quickly as possible, and resolve to stop playing credit card games by paying your balance in full every month.
Dear Liz: My co-worker and I live in New York and work for a hedge fund administrator, but we’re not really savvy investors. Let’s assume my co-worker has $400,000 in cash, no debt, some money in a 401(k) and wants to purchase a home for $200,000. Should she use 50 percent of her cash for this purchase even if she has the credit rating to get a great mortgage? She believes not having a mortgage payment means she is debt-free and better prepared in the event that she loses her job or meets hard times. I believe a mortgage is good debt and having $400,000 on hand is best so that I’m ready for the right investment opportunity. Who has the right idea?
Answer: You both do. It’s pretty easy to make the case that you’ll make better long-term returns investing your money in a diversified portfolio of stocks and bonds than you would by paying off a low-rate mortgage. But some people simply sleep better at night being debt-free.
This, by the way, is not a scenario most people will face. Few have sufficient savings to pay cash for a house. Once they have a mortgage, they probably will have many, many better things to do with their money than pay down low-rate, tax-deductible debt. The invest-versus-pay-off-debt mortgage debate is less relevant than whether they have all their financial bases covered.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604,or via the “Contact Liz” form at www.asklizweston.com.
