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Thursday, December 11, 2008

Shuffling the deck - can card jumping be bad for credit rating?

By Paul Dury

Once that initial 0% interest period is over on your credit card, the APR kicks in and the charges start to mount up. Savvy credit card customers have been playing the credit card balance transfer game for some time now and taking advantage of a generous system. By transferring the outstanding balance to a new card with another 0% interest period, a clever customer can pay off an outstanding balance rather than seeing the monthly repayments vanishing in interest charges. But are the card companies waking up to this practice of card jumping, and can it adversely effect your credit rating?

The simple answer is yes; it does affect your credit rating if you overwork the system. The common belief is that those who build up debt on their credit cards are the most likely to be rejected for further credit and consequently have a poor credit rating. In fact the banks and credit card lenders love these customers because the interest they pay swells the profits of the company. Lenders rely on interest charges to stay in business. Those who pay off their balance in full or make full use of 0% deals don't make any money for the credit card companies. It doesn't seem fair, but this is, after all, a business and the credit card companies are not there for any altruistic reason; they're in business to make money and maintain a stable financial market for all customers, not just those card-sharp enough to play the system.

A credit rating appears to be shrouded in mystery for most people; they know it exists but the chances are they've never seen one in real life. However, it's easy to take control of your finances by simply writing to the three UK credit agencies and, for a small fee, getting your hands on a copy of your credit rating. This will give you details of your financial history including how many times you have card jumped and just what kind of an impact that has on your rating. It's a worthwhile exercise, as mistakes can and do happen. There could be a simple, factual error on your report that is having a big impact on your ability to gain credit and get the most from the market. By exercising your right to access this information you can use the opportunity to correct mistakes and see what action you can take to improve your rating.

Many of the market leaders have more than one product on offer so multiple applications have a very good chance of being rejected. The lender isn't stupid - they will realise what someone who sends out multiple applications is trying to do. The chances are that person knows their credit rating may be poor and is probing the market, trying to find a lender that will let them slip through the net. A cluster of rejections on a credit history could send your credit rating through the floor, minimising any chance you had of cashing in on any 0% offers. This 'Black data' is added to your credit report for all the other lenders to see and you're left in the cold with no chance of transferring balances between tempting offers. How you run your financial affairs leaves a paper trail that can be easily followed by lenders back to a history that categorises you as a poor investment for the credit card companies. If you are going to transfer balances between cards, pick one that suits all your requirements and concentrate on that application, rather than attempting a scattergun approach.

The general opinion is that the best policy to minimise the accusations of being a card jumper is to choose a card with a longer introductory offer period. Some cards give you as much as 16 months interest free credit on credit card balance transfers, but check the small print. These offers do carry a credit card balance transfer charge, sometimes up to 3% of the amount but that initial outlay may be well worthwhile for the amount of interest you will save. Staying with a card lender for longer generally boosts your customer loyalty rating, improving your overall credit score. It also gives you more of a breathing space to pay off a larger amount of the outstanding balance before you have to think about switching cards again. The golden rule is to make sure you don't use that card for anything except the balance transfer, as payments made will go to pay off the most recent debt first rather than your outstanding balance.

The 0% offers aren't there to encourage card jumping - they're designed to pull in new, long-term customers. By taking advantage of these offers you could considerably reduce your debt and avoid paying interest charges, but be warned. Doing it too often can draw the attention of the lenders and damage your credit rating. Use the offers wisely and you could improve your financial situation considerably.

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