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Only Ever Voluntarily Carry a 0% Credit Card Balance

A few months ago I wrote an article listing some of the pitfalls of using many of the 0% balance transfer offers [3] 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 [4]. 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 [5] 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.