Will Canceling Old Credit Cards Hurt My Credit Score?

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So you have had a couple of credit cards for several years, and you have finally paid them all back down to a reasonable amount. You are thinking maybe you should close them out so that you never have the chance to spend on them again. But what are the consequences? Will it really help or will it hurt your credit score? One of the biggest misconceptions about closing out credit card accounts is that you should close your oldest ones first. Not true! Closing the accounts that you have had for the longest amount of time will not improve your credit score. In fact, it will most likely make your credit score go down.

Why will my credit score suffer just because I close my old accounts?

Having credit cards for a long time, whether or not they are active, actually help your credit score because it shows that you have long and healthy credit history. If you close those credit card accounts, it will lower your debt-to-available-credit ratio, making it appear that you have a shorter credit history than you actually do. So shortening your credit history makes it look like you have less experience buying things on credit cards, which puts you at a higher risk of being undependable with your payments. If it appears that you may not make your payments in full or on time, your credit score will not be as high as it should be.

Won’t closing my old credit card accounts erase all the late payments I made?

Maybe you had late payments on a few of those old credit cards, and you think that if you close them out they will be forgotten. This is false. Negative records, such as late payments, can remain on your credit report for up to ten years, whether or not you have paid off and/or closed out those accounts. So whether you have had negative reports on those credit card accounts or not, it is best to keep those accounts open, and allow time to erase any mistakes you made on those credit card payments.

Should I keep my accounts open even if I’ve paid them off?

Yes! Even if you do not plan to use those accounts anymore, it is best to keep them open to prove that you have a long credit history. The longer you have your credit cards and the older the accounts get, the more benefit they are to you. If you feel that there is too much of a temptation to spend the credit that is on those accounts after they are paid off, perhaps you should consider closing out the newer and more recently opened accounts. If all you have are new credit cards, even if they do have low interest rates, your credit score will not be as high because it will look like you have not used credit cards for very long, and have less experience using them and paying the bills on them.

Top 3 Pitfalls Of Misunderstanding Promotional Interest Rates

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Interest rates are commonly misunderstood. It is difficult sometimes to take in all the detail that comes with them, and the many different kinds of interest rates. Still, understanding how interest rates work is an essential part of having credit cards. The penalties for misunderstanding interest rates, especially introductory or promotional rates, can be a mistake that ends up costing you way more than you thought it would. It is important to know everything about the interest rate on a credit card before you even get it. That way, there are no surprises.

Top 3 Pitfalls of Misunderstanding Promotional Interest Rates

1. Buying on credit cards and paying later… in more ways than one

This seems to happen a lot when you buy things on credit from specific stores. They promise you a tempting 0% interest rate for a certain period of time, during which you do not even have to make any payments if don’t want to. But the thing about interest rates is that whether you are paying interest or not, it still builds up, slowly increasing during that time and adding up to be more than you bargained for. For instance, you could buy a couch from a furniture store because it promised a low interest rate for the first six months, in which you don’t pay a dime, and then find out six months later that the interest rate has been climbing and is suddenly ten times more than you started out paying.

2. Balance transfer offers

Along with low interest offers that you often find in stores, balance-transfer offers present great promotional interest rates. But if you find out more about it, you may come to see that these rates may only be in effect when transferring a balance or when a new purchase is made with your card. Sometimes it only applies to one of those cases, leaving you stranded with a high rate when you use one or the other. For example, if you were to transfer your balance to one credit card that seemed to have a low interest rate, but proved only to apply that low rate to new purchases, you come out paying way more than you thought you would starting out.

3. Having low promotional rates sky rocketed into high regular interest rates

Find out exactly when your seemingly perfect interest rate expires. You could get a great interest rate on a credit card at first, but because you did not read the fine print, you come to find out that great rates only last for so long. Many credit card companies will start out with low interest rates, but can increase them after a certain period of time, making you pay ten times more than you started out paying.

Understanding how interest works and knowing just exactly what you’re getting into when you apply for a credit card that has low rates is very important. Paying on credit cards is much easier when you know how much you will be paying now and what you will pay once the promotional rates expire.

Top 3 Myths Surrounding Your Credit Limits

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Credit card limits allow us to set a range of the amount of money we can spend on credit. When used appropriately, this limit will help keep us from spending beyond our means to pay back the amount owed plus interest. So why have so many people gotten into credit card debt by spending on a high credit limit when they knew that they would not be able to pay it back?

Sure, a high credit card limit can be alluring because it makes it look like you can spend all you want and have whatever you want. But a smart credit card holder would know the difference between what looks good, and what will save them money in the long run.

Top 3 Myths Surrounding Your Credit Card Limits

There are a few misconceptions that people often experience when they set their credit limit. Credit card companies can lead them into believing myths that will eventually get them into financial trouble. Here are a few of those myths:

• The Higher Your Credit Limit Is, The Better

Credit Card companies would like you to believe that it is good to have a high credit card limit, and that is true… it’s good for them. High credit limits increase the possibility of excess spending, or spending beyond your means. That leads to larger amounts of money to be paid on your bills, which may cause you to make late payments. Of course late payments result in higher interest rates, making it even harder to pay your dues. Eventually it will take you longer to pay off your credit card debt because you spent more than you can pay back.

• Going Over Your Limit Is Okay If Your Credit Card Company Approves It

Whether or not you pre-approve a purchase that will go over your limit with the credit card company, it will still hurt your credit score dramatically. Your credit score doesn’t depend on whether or not you have authorization to go outside your credit card boundaries, it depends on whether or not you can stay within your limit, no matter what it is, and efficiently pay back what you owe. So even if the credit card company says it’s okay, you still appear unreliable because you went over your set limit, therefore significantly lowering your credit score.

• A High Credit Limit Will Not Threaten Your Ability To Pay Off Your Credit Cards

The best way to stay out of debt is to not allow your spending opportunities to go beyond your reimbursement abilities. If you can easily see that you could not pay back the money you would owe if you spent up to the amount on your credit limit, you simply should not set your limit that high. Keeping your debt as minimal as possible is everyone’s goal, and the debt you incur is more likely to increase if your credit limits are high enough to tempt you to spend beyond your means.

How Much of My Credit Limits Can I Use Without Damaging My Credit Score?

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You know that your credit score is based on how well you can pay back your credit card bills. So how do we know when we’ve spent too much to pay back? Thank heaven for credit limits. We set these limits so that we do not exceed the amount that we know we can easily afford to pay back. So how close can you get to your limit before it starts to damage your credit score? Here are a few tips to help you understand how much you really should spend within your limit in order to maintain a good reputation in the credit world.

DO NOT go over your credit card limit

No matter how much you want to pay for that riding lawn mower with your credit card, even if it costs more money than you have within your limit, don’t do it! Going over your limit can cause your credit score to go plunge dramatically. Even calling in to the credit card company and prearranging an expense that will exceed your limit will not excuse you from the penalties. If the credit card companies authorize you to go beyond your limit it may exempt you from getting your interest rates heightened, but you will still be subject to the consequences on your credit rating.

Spend only up to about 50% of your credit limit, then pay it off

Sometimes the best way to ensure that you do not go over your credit limit is to set a goal that you will pay off your credit card bills once you have spent half of your limit. That way you will not even get close to maxing out. This also helps you to keep your monthly dues at a reasonable amount, allowing you to pay them easily and on time. Being smart and conservative with your money will show that you are responsible enough to pay your debts, allowing for your credit score to steadily improve over time.

Don’t set your credit card limits too high

You should set your credit limits to an amount that you know you will be able to pay back. Having a limit that is too high puts you at risk of spending more than you can afford to make a monthly payment on. It may be somewhat beneficial to set your limit a little bit above your afford ability in order to keep from getting too close to exceeding it. But having a credit limit that is too high for you to ever be able to pay back lulls many into believing that just because they don’t go over the limit means that it’s okay to go up to that amount.
The main thing to remember when you set your credit limits is that your credit score can benefit only if you do not exceed your limit, and if you pay off your debt before you get too close to that limit. Credit cards can either help or hurt you, depending on how you manage them.

Getting Out of Credit Card Debt

The unfortunate reality of today’s financial world is Americans are sinking deeper and deeper into credit card debt. There are so many reasons for it, but the main one has to be our inability to delay gratification. We want it now, and we’re not willing to wait for it, especially because we either have credit cards to buy it with, or we have a store offering us 0% promotional interest rates for up to 12 months. Everything around us tells us to go ahead and get it and pay for it later.

Have you heard the analogy of boiling the frog? You probaby have – if you throw a frog into a pot of boiling water, he jumps right out to avoid getting burned. But if you put a frog into a pot of cool water and gradually turn up the heat until it boils, he’ll sit right there until he’s dead.

I don’t think we humans (and especially Americans) are very different in our spending habits. For example, let’s say the pot of water is a furniture store. You walk in and see these amazing leather couches that would be perfect in your living room. But wait – the couches are $2000 each! “$4000 is way too much money for me right now,” you say to yourself as you turn to walk dejectedly toward the store exit.

But wait – here comes the trusty sales rep who noticed you eyeing those couches. “Anything I can help you with?” he says enthusiastically. “No,” you reply sadly, “I really like those couches, but I can’t afford to spend $4000 right now to buy them.”

“No problem!” replies the salesman with a big smile. “We’ve got a promotion going where you can get those couches with no interest and no payments for a full year!”

Well, now he’s got you doesn’t he? You start telling yourself that in a year your situation will be a lot different. You’ll have pleny of money to pay those off. In fact, you’ll pay them off before the year is up, won’t you? Yeah, of course you will. Which means you get to take those couches home today.

Here’s the problem: you are human (just like the rest of us) and you probably won’t pay off those couches in a year. In fact, you’ll probably take years to pay them off. If the salesman had said, “How would you like to pay $8000 for these $4000 couches?” you would have laughed and walked away. But that’s exactly what a lot of us do!

I’m not criticizing people for doing this (because the first finger would be pointed at me). I believe we make these mistakes emotionally and in ignorance of the real consequences.

Let me suggest one great way to take advantage of these promotional offers while completely protecting yourself from horrible interest payments that last a lifetime.

Let’s say you buy those $4000 couches with no payments and no interest for one year. It’s very simple to make sure they’re paid off before the year is up. The day (and I mean THE VERY DAY) you buy them, log into your online banking services and set up your bill payer to automatically pay off those couches before the 12 months ever arrives.

Here’s how you do it: take $4000 and divide it exactly by 11. This comes out to about $363.64. That is the amount you should tell your bill payer to send to you the furniture store every month. Why 11 instead of 12? For safety. Why let it go down to the wire?

Now that you’ve set up the automatic payment plan, you can enjoy those couches worry free. Best of all, you got to experience the instant gratification of the purchase without ruining yourself financially.

Here are two big disclaimers:

1. Before you make these kinds of purchases, you better make darn sure that monthly payment fits your budget. This is a strategy for people who could have paid cash for the couches (or whatever else) but decided to keep the money in their interest bearing accounts while the couches were in the interest free period.

2. The first automatic payment plan you set up must be THE PAYMENT YOU MAKE TO YOURSELF every week or month. Get a good online savings account (like ING Direct) and have them automatically withdraw from your checking every week. Save an uncomfortable amount! Heaven knows we all spend an uncomfortable amount. Pay yourself first, and then you can spoil yourself with what’s left over.

Hope this is helpful.