(Dave from Michigan) My credit card balances are near their limits with high rates. I’ve been making minimum payments for a long time. If I were to pay off the balance on one of the cards with a lump sum, would this put me in a position to negotiate a much lower rate and subsequently transfer another credit card balance to it?
Dear Dave:
First off, if several cards are nearly maxed out, those lenders are likely to charge you higher interest rates. Their periodic (often monthly) reviews of your account and your credit reports indicate a high likelihood of default. If you add to the mix that you are making only minimum payments, this often labels you as a slow pay cardholder which can further increase your interest rates.
If you have a lump sum of money, you are correct that putting it all on one card is generally the best way to apply those funds. This opens up a lot of possibilities in addition to completely removing one of your liabilities when the balance is eliminated.
For starters, once you pay off the account, do not close it for any reason. While your overall credit utilization rate will remain fairly high, it will be zero on that one account which will have a positive impact on your credit score.
You now have a couple of steps that you can take. On one hand, you might be in a position to ask for a lower interest rate on the account. This will probably only be a few percentage points reduction which will make little difference.
One other possibility is that paying that card off could result in more attractive balance transfer offers. These may take at least 3 months to materialize so you have to be patient. Keep in mind that most balance transfer fees are now 3 or 4% of the transferred balance, so you need to be able to reduce the interest rate by a substantial amount for it to be worth the action.
Promotional balance transfer offers of 8 months or less are rarely worth it unless you are paying off debt at a rapid rate. Instead, balance transfer offers of at least a year might be preferable. Remember that any remaining balance after the promotional period will incur new finance charges at your higher “purchases” interest rate. Still, you may be able to request a lower rate at that point so that it is not as big of a burden.
I do have one additional note of caution. While paying off one balance is a very good sign of financial strength, many creditors may want to see further proof that you can aggressively pay off your bills. They may still be uncomfortable with the high balances on your other cards.
It is probably worth it to take advantage of attractive balance transfer offers if it substantially reduces your overall interest and repayment period. However, if you do not get the offer you need or are denied any request, make sure you hold off on new requests for 3-6 months. You can target one of your other high interest accounts with the extra money you have left over each month now that your one card is paid off. If you do target one account, make sure that you periodically make higher than minimum payments on each one of your other accounts. An extra $20 every 4 months is a good way to keep those in good standing. You may want to follow this example of a repayment strategy.
Tags: balance transfer opportunities