Drowning in Debt? Don’t Make This Credit Card Mistake

by David Ning · 14 comments

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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{ 14 comments… read them below or add one }

HowmuchCover March 25, 2008 at 8:40 am

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.

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Hannah March 25, 2008 at 10:07 am

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.

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thehungrydollar.com March 25, 2008 at 10:07 am

“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.

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Bob March 25, 2008 at 12:17 pm

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.

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Mark @ TheLocoMono March 25, 2008 at 7:05 pm

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.

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Joe March 28, 2008 at 10:45 am

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.

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Anonymous April 25, 2008 at 7:27 am

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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Alvinsmith June 2, 2008 at 4:48 am

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Old Poor Richard February 6, 2009 at 7:17 pm

Glad to see the great advice. I’ve read lately about angry people closing credit accounts when rates get jacked up or limits are lowered. They’re only hurting themselves, like smashing their own car with a ball bat when they’re mad about getting a parking ticket. Transfer your balance then keep the old high rate card with no debt on it.

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Joe the non believer March 2, 2009 at 1:14 pm

I’m curious about your rationale of not closing an account. I’ve heard that an individuals credit report is actually 2 different reports, one that a consumer sees with partial info and one with your entire credit history from day one used by banks , the industry, etc. I would love to be enlightened with the truth.

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OfferCreditCards.net September 14, 2009 at 4:40 am

I think there’s a trap behind if you can close your account or not. The reason why I said that is why would it affect someone credit rating if someone close a credit card account? The best thing that you can do to avoid any problem is to leave the credit card opened without using it.

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ken stoner June 6, 2010 at 8:21 am

Payment Due Dates:
It seems that some of my credit card companies always make payments due three or four days before payday. This does create a problem when money before you are payed is always short. Penalties for being late is really what the credit card providers want. It is easy to change the payment cycle with a phone call but in many cases I have had to call again in a few months for the payment dates seem to slip back to where they were.

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gino July 15, 2010 at 12:24 pm

This is a great article for getting rid of credit card debts. Sometimes it is easy to get carried away with the plastics. I thought I would bring an article more angled towards preventing this from happening to broaden the spectrum a bit.

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WorkingOnDebtFree October 2, 2014 at 9:00 am

I’ve been working on paying down credit card debt for some time now and finally making good progress. It frustrates me though that the banks continue to lower my credit limit as I pay down the cards which never reduces my debt to credit ratio or at least it doesn’t progress as quickly as it could. There should also be a way to include a person’s income in a credit report. Even though I have more than average credit card debt, I also have a higher than average income. Also, be cautious when transferring balances to a lower rate card. Sometimes the lower rate doesn’t compensate for the upfront transfer fee. I used a home equity loan to pay off a good portion of my CC debt and the bank forced me to close the cards they paid off… again, this didn’t help my credit score either. Bottom line… don’t let yourself get to the point that you can’t pay of your credit cards each and every month or worst case within a few months.

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