So, You’ve Paid Off Your Credit Card. Are You Ready for Another One?

The following is a guest post from Miranda Marquit.  Miranda edits information on debt consolidation for DestroyDebt.com.

One of the most insidious practices of credit card companies is the tendency they have to do their best to get you back into debt once you’ve managed to get rid of it. After all, if you aren’t in debt, you aren’t paying interest. However, as you probably know, it is not a good idea to rack up more debt just as you pay it off. Here are some of the temptations you will face once you start paying off your credit card debt in earnest:

Increased credit line

When my husband and I were paying down our debt, using aggressive debt reduction (or the debt snowball as it is sometimes called), we noticed something very interesting: After making two or three months’ worth of dramatic payments, the credit card company sent a letter raising our credit limit. This happened on each credit card we paid down. Credit card companies don’t actually want you to pay off your cards; they want you to carry a balance. They raise your limit in the hopes that you will spend more. And while having a higher limit can help your credit score, since it looks as though you have a lot of room between your balance and your limit, don’t take the bait. Just because you can put more on your credit card doesn’t mean that you should.

New credit card offers

Another thing we noticed was how the number of new credit card offers started pouring in as we paid off our other credit cards. In the first few months after paying off one credit card, we saw solicitation for new cards increase half again. When we further reduced our debt, the offers came with greater frequency. Some of these cards were, actually, better deals. We received an offer for a great rewards card — with better, fixed interest rate — and decided to take it. We did some balance transferring to help us pay off another card, and decided to use it for its rewards (paying off what we put on it each month). The key, though, was that we canceled our other card. If you do find a credit card that is better than what you currently have, you must balance it by canceling another card. In our case, we picked two cards we wanted, and canceled everything else. And we pay off our balances each month.

Purchase checks

These seem like a good idea, since you can use them to get cash or pay bills, without having to pay the cash advance fee. However, purchase checks can quickly get out of hand, and it is important to realize that it is still you using a loan — they do not represent income. And your regular limits apply. Purchase checks can be one way that you find yourself over the limit, since it is easy to forget to factor them in to your charges. Additionally, some card companies will charge you a balance transfer fee when you use purchase checks.

Other financing offers

The latest offers we have been getting from credit card issuers has been in terms of refinancing. All of the banks that issue our credit cards have offered to refinance our home. Of course, the rate is variable.  Additionally, using your home equity to take unsecured debt and secure it with your home is not usually the best idea. Card issuers will start trying to get your money from interest payments in other ways: personal loans, home improvement loans and other loans are all being offered by card issuers. Once you show you are serious about making payments, they are eager to find other ways to keep the money coming in.

Paying off your debt can be a great feeling. But you have to be careful. Unless you have truly changed your mind-set and your money habits, the temptation to take advantage of these ways of getting you back into debt can be overwhelming. The best practice is to pay off your debt, and then do what you can to avoid getting back into debt.

If you are like me, and went a little overboard with credit cards at an early age, you might want to consider a low-interest consolidation loan to group your debt at a lower rate.  If you go this route, cancel all but one credit card, and consider lowering the credit line down to a manageable level.  If you don’t, you could wind up with a consolidation loan and more credit card debt.

Comments

  1. John, that’s the same approach that I take- my credit cards stay at home in my drawer, unless there’s a reason that I’m going to need it.

    A friend likes to always have a card on him just in case of an emergency. To avoid temptation, he puts duct tape over the magnetic strip and keeps it in his wallet. This way, he has access to the card but has to actually work to use it and is reminded of his financial goals every time he tries to peel away the sticky tape.

  2. It really does take some will power and a debt free mindset to stay away credit cards. It helps me to leave the credit cards at home and in some inconvenient location, so I am not tempted to use them.

  3. I do agree that some of the credit card practices are underhanded, but keep in mind that credit cards are a great vehicle for purchases and essentially represent a readily available line of credit that can be used in an emergency, for large purchases (safer than going carrying cash), and for business growth. The credit card didn’t put you in debt, that was your fault. Its a double edge sword, but it seems so many people are only seeing one side of the issue lately with the economy slowdown. They will give you as much rope as you want, but no one said you needed to hang yourself with it.

  4. I totally agree with Dustin’s statement on how everyone nowadays is quick to blame someone else. It is not the credit card company’s fault you are in debt. You are the one who swiped the card and put up the mental block to the fact that the “money” you just used wasn’t free. They just hand you the rope. You are the one who has to tie the noose and put your neck in it without realizing the consequences.

    On a similar note, having watched shows like Big Spender and hearing about these people living outside of their means, I just don’t understand how they did it. Not until the last two years or so, I could never get more than about $18-20K in unsecured credit. In total — that is all the cards I could get. I had a moderate car loan and didn’t even have a house until 3 years ago — which turned out to be a pain in the butt to get. I do not understand how people in my income bracket are given upwards of $75K-$100K in credit cards AND a luxo car payment AND a huge house loan. Who the heck is giving this money out? Are people like that the reason that I cannot get a decent APR on my house loan even though I am current on everything and have been for years and years? I just do not get it.

  5. Same sentiments as David. I completely don’t understand HOW and WHY some people have 50k, 70K, etc. of CREDIT CARD DEBT OR HAVE ACCESS TO and have incomes of 40K, 80K, etc.

    think it’s insane that my ONE CC has an 18k limit. I never charge more than I can pay off in full monthly, and it’s not even close to 18k! And with such a high limit, why would I need more than ONE card?!

  6. I agree with the comments so far. Sure the credit card companies give you that nice pretty rope and say “go ahead, it won’t hurt ya”. But, in the end it’s our decision on how to use the cards.

    For those who are tempted, having a strategy to make the cards hard to use is a good idea.

    You would think that the people handing out the credit would be smart enough to not give people more than they can afford to pay back. But, considering the billions they have lost in the past year, maybe they aren’t.

    I’ve had the experience in the past where they kept raising my limit. I wondered why they thought I needed a bigger limit when I never came close to the old one.

  7. Good post.

    I actually love when my credit card company raises my rate. I don’t spend more, but it’s a cheap credit score boost.

    Purchase checks really irk me though… just more fodder for the shredder and an identity theft risk IMO…

  8. I agree with Dustin. It’s the individuals fault if they get into debt. We use rewards credit cards from Citi, Discover, and Chase. We pay off the balance every month. We can easily determine where our money has gone. In the past 12 months, we’ve gotten $1,390 back from the $36,177 we’ve spent (3.84%). That includes over $100 on a new refrigerator and $40 on a used car.

    I think it’s sad that people feel they need to use cash because they don’t have the self-control to not buy things they can’t afford.

  9. Dustin said “but keep in mind that credit cards are a great vehicle for purchases and essentially represent a readily available line of credit that can be used in an emergency, for large purchases (safer than going carrying cash), and for business growth.”

    Credit cards are NOT a “great vehicle”. They are a rip off. Instead, why not carry a debit card that will do everything a credit card will do except get you into debt. As for emergency’s, try having an emergency fund. Business growth, many, companys grow debt free and because of that they are much more stable.

  10. I was under the impression that it was bad practice to close accounts with zero balances. I was told that it would negatively impact my credit report & score. Is this still true?

  11. @Janny and others that may be interested.
    The answer is both yes and no. The company behind FICO scores (Fair Isaac) has recently modified the way scores are calculated. It more closely represents your current risk value for loans and credit. This means that some people’s scores may change somewhat if you have a history of bad payments between good or other habits that may not have been represented well by the old scoring system (ex.- a short but somwhat good credit history). Under the old system, the average life span of your credit played a factor in your score (total credit account life divided by the number of accounts you have). With the new system, this part is not weighed as heavily as long as the accounts are in good standing. It has been designed so that the analysis of the history is more automatic versus the old score where the score was more of a suggestion.

    That being said, as the new system is named FICO 08, not all credit companies have adopted it yet. Some may not ever as there is a push by the major credit companies to make their own scoring system — VantageScore.
    Who knows if this will become the new de-facto system from now on. Time will tell.

    For more concrete advice, probably the best thing to do would be to keep the account open as long as possible. Simply having credit it not a bad thing in and of itself. Make sure to check on the account regularly to ensure no one is using it without your knowledge. I’m sure that displaying to future creditors that you have have lines of credit that you do not abuse will only be good in the long run. So, in short, I would recommend keeping your accounts open.

  12. Aaron: There’s nothing “sad” about people recognizing their weaknesses and temptations and taking proactive steps to address these challenges.

    Everybody has their own psychological issues when it comes to money- that’s why debt repayment tactics like the “debt snowball” are so popular- they take these issues in to account. Knowing yourself and your challenges isn’t “sad”, it’s called being responsible.

  13. GrubbingLawyer: I would argue it’s irresponsible to use cash instead of a rewards credit card.

    I have a hard time seeing how it isn’t sad that people choose not to receive hundreds or thousands of dollars in cashback rewards because they can’t control their “weaknesses and temptations”.

  14. Dustin, I fully agree with you that credit cards are ideal for many transactions and, when you find the right card (I prefer the CTFS mastercard), can be quite rewarding. For example, I couldn’t imagine traveling on business without a credit card.

    The key, as with most financial issues, is acting reasonably and responsibly when using credit. This is where some people struggle, and why for some getting another card after finally getting out of the hole they dug for themselves may not be a great idea.

  15. I stand by my assertion that credit cards are a great vehicle for many money transactions. I will need more evidence for someone to convince me they are a ripoff than simple stating it. People who are afraid of credit cards shouldn’t have them. But to those of us who understand what they offer and what they demand in return, there isn’t much to concern yourself with. I’ve gotten more than $2K dollars back with my purchases, have a killer credit score, and have a readily accessible line of credit should I need it.

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