Should I consolidate my credit cards?

Balance Transfer Offers and Your Credit Score

Another thing to consider when you're thinking about consolidating credit cards with balance transfers is how you're impacting your overall credit rating. Consolidating your revolving debt may give your credit score a boost or it may lower it -- it depends on what you do with your old credit cards and something called your credit utilization ratio.

Your credit score, or FICO score, is what lenders use to help determine how responsible you are with your money and how risky it would be to lend to you; the higher your credit score number, the lower the risk of lending to you. While this number is determined by a number of variables, a few things are certain: The amount of money you owe in relation to your available credit matters -- this is called your credit utilization ratio. For example, let's say you have three credit cards, each with a $15,000 limit. You carry $5,000 on each card, for a total of $15,000 of debt and a $45,000 available credit limit. If you transfer your $15,000 debt onto a new credit card with a $20,000 limit and close your old credit cards, your credit score may actually drop. Why? Your credit utilization ratio has changed. While the amount you owe hasn't changed, your line of available credit has decreased, and that new ratio makes you appear more of a risk to lenders.

While you don't have much input into how big the offered credit line on your new card will be, you do have control over what happens to your old, now unused accounts. Keep those accounts open but unused and you won't negatively impact your available credit limit or, in turn, your credit utilization ratio.

Ultimately, though, if you crunch the numbers and find you won't be able to pay off the balance you transferred during the low or zero percent time frame on a new low-interest card, then a balance transfer may not be the right solution for your money-saving goals. Let's talk about some other options, next.