Answers To Your Questions About Managing Credit Card Debt

We are receiving several questions about existing credit card debt and whether to close open accounts with no balance. So I will answer several of your questions here.

1. Should I close open accounts that have a zero balance?
   • Leave at least one open to show you have more credit than you are using.
   • Don’t close them all at one time. Close one or two and then check your credit report and credit score in about 60 days to see how it affected your score.
   • Close newer cards with zero balances. Keep older cards that show a lengthy and successful credit history.
2. I’ve always heard that the best thing for your credit report is never to cancel the credit card you’ve had the for the longest time. Is that still the best advice if that card has the highest interest rate and annual fee, and the bank refuses to reduce it?
   • Transfer your balance to another card and leave the old card open with zero balance. If you still have good credit, that company may start sending you lower interest offers.
      
3. If a person loses their job or cannot work, what steps should they take to protect their assets?
   • Contact everyone that you owe money to and explain the situation. They will make a note in your file of the situation, and they will tell you what your options are.
   • Many companies are willing to negotiate since they would rather collect some money from you than have you file for bankruptcy.
   • If it is a temporary situation, be sure to ask if there is a way to keep them from posting negative information to your credit report. The more questions that you ask, the more options that you are likely to be presented.
      
4. How much debt is too much?
   • Your debt payments should be 40% or less per month than what your income per month is.
   • You will probably have financial difficulties if your debt-to-income ratio is between 41% and 49%.
   • You will definitely have financial difficulties if your monthly debt obligations are 50% or higher.

   Debt used in this ratio includes mortgage or rent, minimum credit card payments, car loan payments, and other loan obligations.

   You have to have money left over for food, gas, clothes, and emergencies. That’s just the necessities. You will also want money for a phone, cable tv, movies, entertainment, etc.

    
5. I have a very small balance on my credit card bill, do I need to pay it, or can I let it go until next month?
   • Always pay your bills on time. No matter what the balance is, the payment will be considered late if you do not pay it by the due date. You run the risk of having your interest rate jacked up to the maximum if you are late.
      
6. Can the credit card company raise a fixed APR?
   • If you read the fine print on the credit card agreement, all credit card companies retain the right to adjust a fixed interest rate. They may state a certain time period that they will wait before raising the interest rate. If the time period is not specifically stated, then they will do reviews once or twice a year to adjust the rate.
   • I would look for transfers to a lower rate card that say the interest rate will stay the same until the amount is paid off. If you use these, do not use that card to make purchases, or you will be paying off the amount at the low interest rate while the purchases at the high interest rate will remain unpaid. For example, our current low interest offer is an American Express card, currently offering a 5.9% fixed interest rate on balance transfers until the balance is paid off.
      
7. Would it be bad to take out a lower interest loan to pay off credit cards?
   • It depends on whether you will keep charging to the credit card. The problem with consolidation loans is that people tend to run their credit cards up again. Then they will have the credit card debt and the loan payment. If it will be necessary for you to continue to use your credit cards, will you be able to pay off the balance put on the card each month?
   • The same applies to using your house as collateral to lower your credit card debt. This is worse because you have now put your house in jeopardy if you cannot pay your bills. The tendency is to run the credit cards back up.

     I have personally experienced this. It is difficult to not use the charge cards if you are living with a high debt to income ratio. At the time though, it worked well because the mortgage interest rates had dropped so low that I was able to roll the majority of my credit card debt into the mortgage payment and still pay the same amount on the mortgage without adding much time to the end of the loan. This was because of how much the interest rates had dropped over several years. However, the credit card balances still seemed to climb back up.

      
8. How many credit cards are too many?
   • The general rule is to keep two to six credit cards, but it depends on how much you spend and how much you can pay off. Having too many cards that you charge high amounts on each month and then pay off can sometimes hurt your credit score.
   • You should not have more than one store specific credit card, even if there is no balance on the card. Each store specific card reduces your credit score by about 20 points.
      
9. Is there a way to lower my credit card payment each month?
   • Some credit cards require a monthly payment of 3% and some only require 2%. If you receive an offer for a card that only requires a 2% payment, you can apply for it and transfer your balance.
   • Try calling your credit card company to see if they will either lower your interest rate or payment amount.
      
10. What is the quickest way to pay off credit cards?
    • The best way to decrease your credit card debt is to choose one that you want to pay off first, whether it is because of a higher interest rate, or a higher balance, then pay extra towards that card every month. Focus on paying extra just on that one. When it is paid off, then you can pay even more towards the next one that you focus on paying off.
       
11. Is it better to use extra money to pay down your credit card debt or place it in your 401K?
    • In my opinion, it would be better to use extra money to pay down your credit card debt. My opinion is based on the assumption that you already have some money going into a retirement account or 401K.
       
12. Which should I pay off first, student loans or credit card debt?
    • It depends on the interest rates and the terms. I would pay off the one that is costing you the most first. Usually that will be the credit cards because of the high rate of compounded interest.
       
13. My zero percent interest is ending. Should I pay off my credit card debt with my 401K?
    • In my opinion, I would say no. If you still have good credit, you should have received another zero percent offer from another credit card company. Transfer the balance to another zero percent interest card.
       
14. Can credit card companies sue for non-payment?
    • I am not an attorney, so this is just what I believe happens. If you do not pay your credit card bills, your account will be turned over to a collection firm or an attorney for collection. The amount owed will continue to accumulate interest, and legal fees can also be added to the balance due.
    • Don’t forget that court costs money as well, if your debt is not substantial it will not be worth a credit company to take you to court. They sell your debt to a collection agency for about 20-40% of the total worth, the issuer pockets this money then the collections agency comes after you. This is why debt settlement works, if you pay the collection agency 50% of your total debt they still make a profit.

In Summary

What I have learned is that credit card companies are negotiable. The better your credit, the more negotiable they are. Once you have bad credit, it is harder to negotiate, and they make it even harder on you to pay by increasing your interest rates.

If you have average to good credit and you regularly pay your bills, and you are late one time or accidentally forget to pay your bill, and the credit card company jacks up your interest rate, it is worth calling them to see if they will give you a forgiveness and set the interest rate back to what it was. They will make a note in your file that they did this, so don’t expect it to happen twice.

So the best advice is to keep your payments up-to-date, and work on reducing your debt. If you cannot pay down your cards on your current salary. Consider taking an extra job and dedicate the full pay from that job to paying down your debt. Do not get use to living on the extra income or you will have to work two jobs forever.