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Drowning in Debt? Don’t Make This Credit Card Mistake
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This is a guest post by Linda Bustos, an editor for CreditorWeb, where you can learn about using credit cards wisely.
People who find themselves in credit card debt may take serious measures to prevent balances from creeping higher. Often this includes transferring large balances from older, high interest credit cards to a brand new credit card with a 0% or very low introductory interest rate.
To remove the possibility of ever using the original card with the big, bad interest rate, one may make the mistake of closing down the higher interest credit card(s) and just sticking with the new card.
While shifting the debt load to save interest is often a wise decision (provided you actually have a plan to pay off the majority of the balance within the introductory period), closing the original card is not. Here’s why:
Credit History
Even if it’s bad history, you don’t want to make it disappear. If you held a job for 10 years, even if you got fired, the work experience is relevant and valuable on your resume. You wouldn’t want to remove it from your resume, it could hurt your eligibility or attractiveness for future jobs.
Same goes for credit accounts - even if they have stains on the record, the record is still valuable.
Debt to Credit Ratio
Older accounts often have higher credit limits than new cards. Credit lenders will look at your debt:credit ratio (% of your total credit you are using) to assess your risk and what interest rate they should charge you. Closing an old account with a high limit can have a dramatic impact on your debt:credit ratio.
For example, if you “max out” a $15,000 limit on Credit Card A, your debt:credit (not counting other forms of credit) would be 100%. You are using 100% of your credit available.
You open Credit Card B with a low introductory rate and a limit of $15,000. You transfer $15,000 from A to B, and you have $15K:$30K debt:credit, or 50%.
Close Credit Card A and you’re back to 100% debt:credit.
Just Chop ‘Em Up
Instead of closing your credit card account, leave it open, and cut up your credit card! Don’t use the new card until it’s fully paid down, and keep reading MoneyNing to stay motivated on frugal living and debt freedom.
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Are you fed up with scraping the pennies together at the end of the month? It's time to get impartial and expert debt advice from professionals in debt management and possibly avoid bankruptcy with an IVA or a consolidation loan, or another debt solution.10 Responses to “Drowning in Debt? Don’t Make This Credit Card Mistake”
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Bad Debt » Blog Archive » Drowning in Debt? Don’t Make This Credit Card Mistake on March 25th, 2008 at 9:23 am Says:
[...] Read the rest of this great post here [...]
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Personal Finance » Blog Archive » Drowning in Debt? Don’t Make This Credit Card Mistake on April 16th, 2008 at 11:42 am Says:
[...] Original post by MoneyNing [...]
It all sounds like a good idea on paper, just do it like me, chop ‘em up. I´m joking i can´t leave without my cards, all you need it´s a lot of self control.
Good tips! Another one I would add is to always wait for your statement before paying the balance. I know a number of people who when they got their first credit card to build credit went home and paid the balance every day instead of after their statement came (but before the due date of course!). Their credit wasn’t as good as it could be as the credit reporting companies didn’t see that they used their card, as their statement balances were near zero.
“Even if it’s bad history, you don’t want to make it disappear.”
Not enough people realize this. They’re so excited about paying off a credit card that the first thing they do is call and cancel it. Good on them for paying it off, bad on them for canceling the account. Like Linda says, just cut it up instead.
Watch out when transferring large balances to 0% introductory rate cards. Look at the rates after the introductory period and make sure they are not higher than the card your transfering from.
If you really want to keep the card but keep it out of sight, you can always put it in your safe deposit box where you might keep your passport or will.
TheHungryDollar makes a good point about people thinking they’re doing a good thing canceling their cards. Another thing I see a lot of people do is avoid debt entirely, thinking that having no debt is really good for their credit score.
What they fail to consider is the lender’s point of view and that it is difficult to tell if a person with no debt history is a high risk or low risk borrower. Given that unknown, most reputable lenders will likely err on the side of caution and assume they are high risk!
Though it may sound like a good idea to cut up the cards, I would prefer to have them available should I ever need them. The great suggestion was made to lock them up with other items. Also, though they are paid off make sure to check on them periodically online and by getting a free credit report every 4 months.
As Bob said, make sure to look at the intro rate expiration date. It is usually best to take a rate that has no expiration if you plan on paying it off but it’ll take longer than the intro rate’s expiry date.
The problem with taking rates that expire is that you don’t just get stuck with extra interest for what you have left — the card company will have accrued the interest over the period and can stick you with a HUGE lump sum of interest. Always read the fine print before you sign.
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