Small victories over my credit cards

[jrwilheim]

Today I managed to pay off one of my secured cards, which means that I've cancelled it and will get my $500 deposit back in the mail in a couple of weeks. YAY!

My other card lowered my rate from 18.9% to 5.9% after I called and asked to cancel. I still have to pay the b********y $1 per month "participation fees", and they won't unsecure the card, but hey, where else am I going to get credit at 5.9%?

[AshleyJordan]

Glad to hear you're cleaning up your credit report!

[mishl982]

Great job! And I would totally pay $1 for the lower interest rate!

[jrwilheim]

Glad to hear you're cleaning up your credit report!

Not exactly. This doesn't reflect anything on my credit report, just my ability to leverage an unsecured card to get better rates on my secured card. And cancelling an account actually worsens your credit score, but I want that $500 back SO BAD.

[AshleyJordan]

Ouch. Sorry-- I didn't know that.
Guess I meant to say "glad to hear you're getting $500 back" ?

[redav]

So, is the plan to use the $500 to pay off the next card?

Advisors often give the strategy to continue paying the same total amount toward your debt, even after you eliminate one (e.g. if you pay off a $100/mo debt, add $100/mo to the amount you pay on another debt). I did this when paying off my car. My budget was used to not having the extra money, so when that loan was done, I took it and started saving for a house rather than increase my standard of living. This strategy worked great because I saved quite a bit in interest on the car (which increased my down payment), and I never felt deprived when I was saving for the house (you don't miss what you never had). And, it rolled over again into covering the added costs of a house.

[jrwilheim]

Ouch. Sorry-- I didn't know that.
Guess I meant to say "glad to hear you're getting $500 back" ?

Yeah...basically, one of the big things that effects your credit score is your balance on all your cards divided by your total credit limit on all your cards.

For instance, let's say you have $4,000 in total balance on all your cards, with a total credit limit of $10,000. You're thus using 40% of your available credit.

Now, let's say you cancel one card with a $5,000 limit because you never use it. You're then left with a $4,000 balance spread across cards with a total $5,000 limit. So you're now using 80% of your available credit. That worsens your credit score.

But my limits aren't high anyway--before this move, I only had $1,750 in available credit limit, now I'll have $1,250. I have about $600 in debt, which I'll slowly pay off once I'm working again. I used to only have $1,000 in total credit limit, so this is still an overall improvement, plus my rates have gone down.

[jrwilheim]

So, is the plan to use the $500 to pay off the next card?

Advisors often give the strategy to continue paying the same total amount toward your debt, even after you eliminate one (e.g. if you pay off a $100/mo debt, add $100/mo to the amount you pay on another debt). I did this when paying off my car. My budget was used to not having the extra money, so when that loan was done, I took it and started saving for a house rather than increase my standard of living. This strategy worked great because I saved quite a bit in interest on the car (which increased my down payment), and I never felt deprived when I was saving for the house (you don't miss what you never had). And, it rolled over again into covering the added costs of a house.

I'm not going to use this $500 toward credit card debt. Probably I'll stick it in my "house fund" (a mutual fund in which I currently have about $4,500).

Advisors typically recommend what's called the "debt snowball method" for dealing with credit card debt, which works as follows:

1) Add up the minimum payments on all your cards. So if Card A has a minimum of $50, and B has a minimum, of $25, and C has a minimum of $125, you get $200.

2) Figure out how much you can pay toward all your cards above and beyond the total of all those minimums. Let's say you could pay an extra $200, so $400 total can be used each month to pay down credit card debt.

3) Rank credit cards in order by interest rate, highest to lowest (NOT by total balance). So if you owe $1000 on Card A at 12%, $500 on Card B at 6%, and $2500 on Card C at 9%, you would go ACB.

4) Pay the minimum on all cards, but apply whatever you can pay above the minimum to the card with the highest rate. So in our example, the extra $200 would go to pay off Card A.

5) When the card with the highest rate is paid off, take everything you're paying on that card, including the minimum payment, and apply to the next-highest card.

6) Repeat 5 until all cards are paid off.