Credit, Debt, Free, Personal Finance 

Only Ever Voluntarily Carry a 0% Credit Card Balance

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A few months ago I wrote an article listing some of the pitfalls of using many of the 0% balance transfer offers out there (and putting the cash into an ING or Emigrant Direct, earning interest on free money). Well, in a post I read today by Cap at StopBuyingCrap, he detailed the history of his credit score. I think this gives us huge insight into the value of some of the credit improvement strategies I’ve read out there. (and leading me to think of one I hadn’t seen before, take a 6-month 0% balance transfer to give yourself a healthy spike in your score after the six months)

The most notable part was in Oct 04 his score dropped from a 709 to 667, all because of a nearly $8,000 balance transfer offer of which he used nearly 99% of. He carried it for six months (the length of the offer) and promptly paid it off. When he paid it off, his score jumped from 684 to 751.

This goes back to the idea presented by a commenter on The Wealthy Blogger that contended that carrying a credit card balance improved your score enough that it justified paying the interest. I fervently disagreed with that notion. I think Cap’s disclosure of his history puts that theory to, at least partially, rest.

While this wasn’t a scientific study (who knows his activity in the six month period, you can see that from November 04 to April 05, his score increased from 667 to 684. For carrying a nearly $8,000 balance and paying the minimum payment, he was rewarded with a score improvement of less then 20 points in six months. If your interest was, say a measly 20%, you would’ve paid about $400 for 20 points – $20 a point.

If you notice carefully, his score jumped to 751 after he paid off his balance. This could lead one to argue a new strategy, but more of a rich get richer (good scores get better): Take advantage a short term 0% balance transfer, say six months, get the free interest money and pay off the debt in one fell swoop to score a huge score increase. In the six months you carry, your score will be depressed. However, afterwards you saw that Cap’s score went from 709 (pre-balance) to 751 (post-balance) for a net improvement of 42 points. In this scenario, you get 42 points and some cash interest (let’s say $100 or so) instead of 20 points at a cost of $400.

What do you think?

Update 8/12/05: Cap points out in the discussion below that he also has himself removed as an Authorized User from another account (with his mother) that would’ve increased his percent utilized score. He predicts that had he not done that his score would’ve returned to his original 709.

{ 6 comments, please add your thoughts now! }

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6 Responses to “Only Ever Voluntarily Carry a 0% Credit Card Balance”

  1. Michael says:

    I think that, put simply, your score drops a bit while you have the 0% arbitrage in effect. How much would depend on what percentage of that card’s limit you’re using for the arbitrage, as well as what percentage of your overall credit limit you’re using. I’m not sure why this matters a whit if you’re not about to go shopping for mortgages, auto loans, or whatever sort of debt.

    I’m sure that my FICO has taken a ding because of the high balance on the card that offered me the deal I’m currently using, but I don’t much care. When I zero-out the transaction in October, my score will (should!) head right back up — assuming nothing else about my situation has changed.

    According to the book YOUR CREDIT SCORE by Liz Weston, the credit scoring setup doesn’t care whether you “carry” a balance or not. It checks your balance at a given moment in time — once per month, or whatever — and that’s that. It knows only that if there’s a balance on the card at that moment in time, then there’s “usage” occurring. Of course, the balance-to-limit ratios do come into play . . ..

  2. Cap says:

    I didnt notice this post till now, and I just realized I missed out another reason why the score jumped so much; since you mentioned, without knowing my whole picture its hard to tell what was going on..

    But basically only two major thing happened during those time period, I paid off the $7,700, and I removed myself from an authorized user card.

    See I was checking my scores and report during April because I’m about to pay off the debt, and wanted to see where I stand so I know my chances of getting new cards.

    My mom put me on as an authorized user on a Citi Drivers Edge MasterCard. The card has a $9,000 credit limit and she has $6,000 in balance on it. I’m assuming its some low interest rate deal. That balance to limit ratio didn’t help my score at all so I told her to remove me from the UA.

    Experian promptly removed the account from my credit report, but Transunion and Equifax didn’t. I had to dispute it online.

    So those were the two factors. Removing the high balance account from my history, and getting rid of a debt. If I didn’t remove the account, my score will probably just go back to normal around 709 (plus maybe a few for another 6 months of positive history).

    In either case, I know you dont have all the detail of my situation, but from everything I can see.. there’s really no point holding a balance to get your score better, as mentioned, the balance is only updated once a month anyway. Your credit score reflects whenever you check it. Let’s say your report hasnt updated yet with the higher balance and you check your score, you’ll have a high score. Give it a day and the account balance updates, then your score will lower.

    Sorry for the long post, but during the month of April I was using a daily credit report pulling service, so I had a good idea what was going on and how actions was affecting my score.

  3. Cap says:

    oh yeah, i decided to edit that post of mine to give more information, I think during my next update much later.. I’ll try to lay out exactly whats on my credit report, and the activities during those time period.

  4. jim says:

    I look forward to it, I like that you’re opening it all up so people can learn how things affected your score, it’ll give them an idea of how actions really affect your score instead of the “this is worth 25%, this is worth $10%) sort of things you see out there. Send me an email (or trackback to this) when you make the updates, I’d love to blog about it.

  5. ASAP Credit Card says:

    Whether or not this method can improve your credit, remains to be seen. But if your goal is to pay off your debt as quickly as possible, 0% APR credit cards are a great tool.

    0% interest credit card offers can be an excellent way to pay off your debt and save money on interest. While some people make the mistake of getting “sucked in” to the credit card companies tactics and run these offers up due to NO INTEREST, if you use 0% APR credit cards wisely, you can carry your debt completely interest free until the debt is paid off. Just transfer to a new 0% APR credit card every time your “teaser” rate is about to expire.

    No matter how you look at it, paying off your debt can only have a POSITIVE impact on your credit in the long run!

    [links edited – if you’d like to advertise on this site, there are additional details here]

  6. S. Teitel says:

    I am wondering what the effect of a positive balance could have on the FICO. If instead of just having some 0 balance credit cards, what if the balance was $10.00 over? What if $50.00 over? What if $1.00 over?

    interested in your thoughts.


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