How will taking on an extra $7,000 in debt hurt my credit score?
We received a very smart question this morning:
(1) Limit of $2,000
(2) Limit of $9,100
I have never held a balance or used more than approx. $500 of my available credit.
Here is my situation:
My fiancé just recently got into a $7,000 problem with her AMEX card, which only lets her pay off the full amount. I asked credit card #2 what my interest rate would be if I transferred the debt to that card and they told me it would be fixed at 3.99% until Nov 2009 and I would incur a one time 3.00% transfer fee. I will pay off the card prior to the November 2009 deadline when the interest rate spikes.
I am going to look to buy a house after we get married, not right away, so I wanted to know how this will affect my credit rating. I feel as though the longer she holds that balance on the AMEX and gets charge the $300 delinquency charges the more her credit will be affected.
What should I be cautious of? What do you think? Your recommendation will determine if I proceed or look for alternative options. How will my credit be affected long term?
There are a couple different things to consider in this situation. If he transfers the $7,000 balance to his existing credit cards, his credit score will likely be damaged. This is because he would increase his total debt-to-limit ratio from 4% to 68%. Any percentage above 10% causes harm to your credit score. And as the percentage increases, so does the score damage.
If he has good credit, I would recommend opening a new account with a 0% balance transfer offer instead of transferring the balance to an existing account. He can compare balance transfer rates and fees on the cards available at Credit.com.
If the new card had an $8,000 limit, for example, his debt-to-limit ratio would be 39%. Still too high, but not as damaging as 68%.
And as side note, he should be very cautious about taking on this debt. Blending love and debt is rarely a good idea and I’ve heard far too many stories where people are left holding the bill. Before he decides either way, make sure that she has communicated with Amex and worked out that there are no solutions she could work out on her own.
When he's ready to buy a house, all he needs to do is get that debt-to-limit ratio down below 10%. Either by paying off the balances or by increasing his credit limits further. There is no lasting damage from having a high debt-to-limit ratio. As soon as the ratio changes, your credit score changes.
Emily Peters – Credit.com's personal finance expert and former TransUnion credit expert. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.
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