Balance transfer and debt consolidation question

[Anonymous]

I just took advantage of an offer, from a card I have had for a year, to do a balance transfer at 0% for 12 months.  During this process I've been monitoring my score on creditkarma.com.  Being new to balance transfers, I expected a slight dip in my score, but it fell 50 points overnight.  Is this a typical drop?  More importantly, how long can I expect this to effect my score?  If all else stays the same and I pay it off quickly, will that improve my score faster?  

Along these lines, would taking out a debt consolidation loan have a similar effect on my credit score?  Would there be a big initial drop?  Would it effect my score for just as long?  As long as my credit score has already fallen, I'm wondering if it would be better to pay off all my debt with a loan, working my score up from there.  I've been working at getting out of debt for several years but feel like I'm not getting anywhere.  Making one payment is very appealing and it seems it might be a faster way for me to get out of debt as long as the interest rates aren't vastly different.  It's just making me wonder if I should worry more about getting out of debt than worry about my credit score right now.  I appreciate your thoughts.   

[laz98]

The scores from CreditKarma are not FICO scores, so I wouldn't pay too much attention to them.

Yes, I would definitely worry more about getting out of debt than scores right now.  It will just drive you nuts.

[RobertEG]

One thing for sure is that, on the average, doing a BT will normally cost most consumers more $$.  I say normally because it depends on how and when you pay it down.

Creditors would simply not be offering BTs with such furvor if their statistical analysis did not show, on the average, more $$ in their coffers.

If you play the game right, they can be an advantage, but on the average, most consumers dont.

Are all payments made during the introductory period applied only to the 0% BT segment of the acct, thus freezing your interest-bearing balance until the BT balance is paid?

Will you be able to pay off the BT balance by the end of the intro period?

How high is the BT fee?  It is an upfront fee, not an APR.

Debt consolidation loans also require some analysis.  Sure, at a lower interest rate, a financial advantage.  From a scoring perspective, a new inq an a lower AAoA will result.  Is the debt being paid a type that will show immediately in your score, such as % revolving, or is it in a scoring category where little benefit will show, such as unpaid, bad debt?  It is not really debt reduction, it is shifting the deck chairs.  How does the new position of the new deck chairs help scoring?

Its great that you are asking the questions.  Play the game right, and it can be a plus.  Look only at today, and it could hurt.

[crunching_numbers]

Keep in mind that CreditKarma is not a FICO, and will move with great flourish in both directions.

Usually both sides of a BT do not hit your CR at the same time. After both cards hit (the card lowered in balance as well as the card raised in balance) the net effect should be cancelled out.  That is, utility % will go back to whatever it was before you initiated the BT, and so will your score. All you are doing is shifting which card holds your balance. Your AAoA stays the same with an existing account. You might have a small reduction if the BT card is close to maxed, but that will go down as you pay it lower.

[Anonymous]

Thank you, everyone, Crunching_numbers especially for that last explanation.  That's what I was expecting, that it would kind of cancel out so, I was a little surprised.  I am aware the creditkarma scores aren't the FICO scores.  At the same time, I had just gotten my FICO scores about a month ago and they were a match so, I figured even if they weren't exactly the same, it gives me a good idea and a cheap way to monitor. 

As for the BT, the fee was $35 and I will be able to pay all of it off well before the intro period is done.  It is towards debt I have been paying as agreed upon. Like you said, if I play my cards right, I would imagine, making balance transfers as long as I'm able to pay them without bearing interest will help me in the long run. 

In terms of getting the loan, the card with the highest balance is actually at 9%.  The loan, again, is at 13%.  So, I'm thinking one of two things.  One, get a smaller loan and just pay off the cards with interest higher than 13%.  That way, I'm still paying off my high balance card and just making one payment on the loan at a lower rate.  When the loan rate is paid, I can snowball that into the payment on the other card.  Plus, if I pay off some of the cards with the loan, maybe my credit will improve so that I'd be able to get another loan for a better rate to pay off the remaining card - who knows, that's getting a few steps ahead.  Now, two, I could get the loan for the whole amount.  Even though the rate is higher than the high balance card at 9%, it would free up all the money I had been using to make minimum/payments in addition to the spare money I have to pay down my debt to put it all towards one payment.  I was told was my loan payment would be $350/month for 3 years.  As it is, all of my minimum payments equal about $300.  But again, they are going to different cards.  So, to use it for one payment, I'd have the $350/month covered as well as an additional $500-700 each month to pay the loan off.  With that much to go toward the payment, it initially sounds like I'd be able to pay it off before those 3 years are up.  But again, without figuring out the math, maybe this is just sounding more appealing emotionally. 

My concern through all of this is twofold though.  On one hand, I don't have a savings account because of my debt.  If something came up, it would backfire if I had to take on more debt for an emergency while I'm already paying on a loan that was intended to get out of debt.  My other concern is how this would effect my credit score which would effect my rates on a new car at some point in the not so distant future.  My car is currently 13 years old with 140k miles.  So, I have to be thinking ahead about how I would handle that.  Obviously my worry is if I take on this loan, my score plummets and I have to get a new car, I'll get a horrendous rate on a car.  Again, getting a little ahead of myself but both are things I have to keep in mind.   

[Anonymous]

Since you mention that you have no savings but would have 500 - 700 extra per month to put towards the loan I would suggest that you make the minimum loan payment for 6 months and put that money away towards savings / emergencies. Six months would build a nice little nest egg for anything but the most major occurrence. Then you could apply that towards the remaining loan balance and pay it off earlier than the 3 year due date.

And just put the new car purchase off until your current debt obligations are paid. I understand the new car want. I have it too. But i have a 2 year debt payoff plan to work on before I do it. It's just my plan and an excel spreadsheet. Not a formal debt management agreement. If I start to falter away from it I just look in the mirror and ask "Who's the guy who put you in the situation of having this debt anyway?"