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.
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.