What do you need to know before closing a credit card?

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These days, credit cards make up a pretty big portion of one’s credit portfolio. This is the most common debt we all carry. For many, it turns out to be a good form of credit, as it helps in times of emergency, and has the “pay later” option.

Still, for some, it becomes a big obligation when balances are left unclear, and penalty charges accumulate over time! That’s exactly when a certain thought crosses our mind: We are better off closing a credit card than carrying its load forever!!But,

Here are a few things to know before you head on to cancel your credit card:

a. First, whether or not this is the only card you have

One section of consumers believes in the idea that it is always better to carry one card. The reasons, even though debatable, are quite strong. It helps you to have a good credit portfolio if you can use it responsibly. On-time payments and periodical use of a card do ensure a clean credit report. Plus, the perk is, it keeps your credit score intact.

On the other hand, many believe (including Mr. Dave Ramsey), that there’s no point in keeping a credit card obligation in your head. It’s a burden they say. A credit card can easily be replaced with a debit card. Especially if you are using a credit card just to keep the credit account alive! In such cases of a dilemma, it’s completely up to you whether or not you want to keep this single credit account open!

If you believe that this account can come of real help in the long run, and you are on the safe side with this account, then it’s better not to remove it from your credit portfolio!

Else you can get rid of it. But, you got to consider one thing: if you don’t have any other ongoing loans or any form of credit, then closing this credit card will result in a null and void credit profile.

In the future, if you want to take out a loan or a credit card, then things will get really difficult, and you will have to build your credit from scratch all over again for approval!

b. Second, if this is a pretty old card, and makes up a good portion of your credit history

Well now, this is an important factor that you should always keep in mind before you plan to cancel a credit card. Closing the oldest credit card is probably not a very good idea!

Your credit history is a summation of the ages of all of your credit accounts. Closing your oldest account will decrease your average credit account age.

As credit history makes up a good percentage of your credit score, it can also hit your credit report pretty badly. If the card does not have a hefty annual fee or costly charges, then you should not aim to close it! Consider this card to be your base credit account, that will always help you to achieve a good credit score, if used wisely and infrequently!

c. The last thing is, how to close a credit card wisely so that it doesn’t hurt the credit score

This part is something that I feel to be the real trick! Guess you already know what a credit utilization ratio is. It is your overall credit card debt is divided by your total available credit limit. The result is then multiplied by 100, to get the percentage.

The hidden art of closing a credit card without hurting your credit score is not to increase your utilization ratio!

Well on, here’s the example, to help you understand how to keep the utilization ratio lowered even when you are closing a card.

Suppose you have 3 credit cards:

  • CC1: Bal. $2000, Lim. $5000
  • CC2: Bal. $500, Lim. $2000
  • CC3: Bal $1000, Lim. $3000

Your current credit utilization ratio is : [(2000+500+1000) / (5000+2000+3000)]*100 ; which equals 35%. Let’s assume that you want to close CC2, as you barely use it.

So, the first thing that you will do is clear the balance on the card and then ask the bank to close the account permanently. Once the account is closed, you are left with CC1 and CC3.

Your new utilization ratio based on these two cards will be, (3000 / 8000)*100, which equals 37.5%. As you can see, the ratio got increased, which will heavily hurt your credit score!>

So what you need to do before closing a credit card, is that clear all your existing credit card balances! Once you do that, your utilization ratio won’t increase, and your credit score won’t be affected!

Consider the above example again. If you clear all the credit card balances, then the utilization ratio based on CC1, CC2, and CC3, will be: (0 / 10,000)*100 = 0% (This is the ideal and best ratio to have).

Now, once you close CC2, your new ratio will still be 0%, as the balances are zero on all the remaining cards! Hence, keep in mind to clear all your credit card balances before closing a single card, so as not to hurt your credit score.


Is it wise to consolidate credit card debts with a home equity loan?

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People may think that consolidating credit card debt is nothing but a waste of time and they should always avoid it. However, the truth is something different.

Credit card consolidation is a streamlined option where you can easily consolidate numbers of credit card debt payments into a single, low-interest monthly payment. If you opt for this method, you can lower your credit card interest and also the number of payments every month.

Major credit card debt consolidation resources

These are a few major resources you can opt for to pay off credit card debts:

  • Balance transfer card
  • Home equity loan
  • Personal loan
  • Car loan
  • A loan from a 401(k) or IRA
  • Consulting a credit consolidation company

Now, we will discuss the 2nd option from above i.e., taking out a home equity loan to consolidate your credit card debt.

Can you use a home equity loan to consolidate your credit card debts?

Most of our industry specialists might suggest you take out a home equity loan to consolidate credit card debts. The interest rate of a home equity loan is quite lower than other conventional loans and it is tax-deductible too. So, it won’t be a bad choice if you utilize your home equity and take out a loan to pay off credit card debts.

But before that, you should know a bit more about home equity loans.

What is a home equity loan?

A home equity loan is nothing but borrowing money against your existing home equity (the current value of the part you own). If we try to understand the concept of home equity through a simple equation, it’ll look like this:

Your home equity = (The appraised value of your home – The value you owe on the old mortgage).

For example, suppose your home’s appraised value is $500,000 and you owe $300,000 on the old mortgage. Then your home equity valuation will be $200,000. Practically, you may use that $200,000 equity to take out a home equity loan, if your lender allows.

Can you use a home equity loan to consolidate your credit card debts?

Most of our industry specialists might suggest you take out a home equity loan to consolidate credit card debts. The interest rate on a home equity loan is quite lower than other conventional loans and it is tax-deductible too. So, it won’t be a bad choice if you utilize your home equity and take out a loan to pay off credit card debts.

But before that, you should know a bit more about home equity loans.

Is it possible to get a home equity loan from your existing mortgage lender?

Apparently, yes. It is easier to get a home equity loan from your existing mortgage lender than other money lenders. This is because the existing lender will get an opportunity to make money from the same house twice, in the form of a first mortgage and the second mortgage.

It is notable that a home equity loan can also be called “the second mortgage”. This is because as a borrower you are able to tap your existing home equity and take out another loan. The interest rate on a home equity loan might be higher than the old mortgage keeping the collateral (the house) the same.

Does it always make sense to use your home equity?

You’ll have the provision to use your home equity and take out a home equity loan to consolidate credit card debts. This way you can lower your credit card interest rate and can also use that money to meet your other expenses.

But there are a few risks associated with the process. Industry professionals may suggest you use a home equity loan in your emergencies, rather than for making debt payments.

Let’s verify the actual truth behind this statement by checking the pros and cons of a home equity loan.

Pros and cons of using a home equity loan to pay off credit card debts

Pros Cons
Home equity loans have lower interest rates than credit cards. Home equity loan repayment tenure is long. The lender normally allows 10 years or more to pay off the loan.
Home equity loans have lower monthly payments compared to other loans, so your monthly budget will remain intact. Home equity loans have closing costs and other fees.
Interest payable on a home equity loan is tax-deductible. Your house will be again used as collateral. If you somehow fail to pay off the home equity loan, the lender might foreclose the house.
The home value might drop due to many reasons, so you may owe more than what you have borrowed.
Home equity loans can’t be discharged easily in bankruptcy like a credit card debt.

Many borrowers have become tempted to use the home equity fund. They also forget that the debt is still there but in a different form. They have just made it easier to pay it back through the loan. If you follow their path and indulge your spending habits to make more debts, simply put, you’ll be in deep trouble very soon.

Taking out a home equity loan will make no sense if you don’t live within your means. If you use the money to serve other unimportant expenses, you might lose your most valuable possession, i.e. your home.

So, before using a home equity loan to consolidate credit card debts, you need to consider a few things:

a. Check your spending

You should find the reason why you have too much credit card debt. If the reason is overspending, consolidating your credit card debt won’t help you much. You should find ways to restrict your spending habits. Also, you need to find an additional income source to increase your cash flow.

Remember, you are going to take out a home equity loan to pay off your credit cards. To pay off your home equity loan, you must maintain a constant cash flow in your account.

b. Make a budget plan

You should plan a budget and calculate how you should pay off your other debts like medical bills, utility bills, student loans, payday loans, etc. While opting for a credit card consolidation method, you’ll make some free space in your monthly budget. But remember, do not overspend using your credit card. If you do so, you may increase your total credit card debt again. So, limit your credit card usage and use cash to make payments.

c. Ask your creditors to become more flexible

You may carry multiple credit cards from a single creditor. You may ask the creditor to be more flexible with the payment process and lower your interest rates. You may also request him to lower the amount of minimum payment per month.

Additionally, if your creditor can waive off late fees or change the billing cycle as per your flexibility, that would be great


Consolidating credit card debt will be a great decision to lower your monthly expenses as well as to achieve your prime goals. But taking out a home equity loan to pay off credit card debts may put your house at stake. So, you may avoid risking your home equity just to clear your credit card bills clearly.

If you are not confident enough to pay off your credit card debts by using your own income, you may borrow money from the other resources mentioned above. Trust me, it’ll be quite dangerous to transfer your unsecured credit card debts into a riskier secured mortgage debt.


Consolidate credit card debt into one payment and make your life easy

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Credit consolidation is mentioned many times by financial experts to the debtors looking for a suitable debt payment strategy. But many people ignore the immense potential it holds to take them out of a debt-ridden life. It is simple, convenient, and is only useful to those who want to repay their credit cards in full amount. Otherwise, the whole purpose of credit consolidation is lost.

Do you want to know more about credit card consolidation and the tips to apply while using it? Read further.

What is credit card consolidation?

In credit card consolidation, the various types of debts, be it loan payments or credit card bills, are rolled into one monthly payment. If a debtor has multiple loan accounts or credit card accounts, credit consolidation may be a good way to simplify or lower the payments.

If you are planning to take out a new loan, obtain a new credit card, or enroll in a debt management plan. Whichever option you choose will help you pay off multiple balances.

For credit card consolidation, you’ll be left with one monthly payment and along with that, a new loan, a new credit card, or enrollment in a consolidation program. Not only does it help you in saving dollars as you make a relatively low one-time payment, but it also simplifies the payment process.

3 Ways to consolidate credit card debt

  1. Use credit card balance transfer – A balance transfer is a process of transferring debts from one credit card to another. This process applies when the intention is to save on interest payments each month. Fees are inevitable, introductory rates expire after a certain time, and good credit standing may be required to qualify for a suitable balance transfer card.
  2. Take out a personal loan – You can obtain personal loans from banks and credit unions. Your credit score is an important factor that is taken into consideration by banks to determine the eligibility and the interest rate on your loan.
    The advantage of using a personal loan is to replace your multiple credit card debts with a loan whose interest rate is usually lower than your existing credit card rates, and you will get several years to pay off the debt.
  3. Enroll in a consolidation program – If you can’t handle your finances on your own, it is always safer to seek the help of a professional. Thankfully, there are consolidation programs to take you out of this mess. Begin with a counseling session with a counselor whose job is to review your financial situation and based on that he/she will advise you to take action. It is one such program that will clarify all your financial queries and your job to pay back debt will become easier.

6 Tips for consolidating credit card debt

Now that you know how to consolidate your credit card debt into one payment, let’s discuss a few tips that can make your debt payment process easier. Here are the tips:

a. Plan a budget

Planning a budget is very crucial as it will direct you to consolidate credit card debt in an effective and precise manner. A realistic budget grants money for debt payments contributes to your savings accounts and saves money for emergency funds.

Be realistic about your budget planning and leave some space for fun. Save money on leisurely pursuits by adjusting your dollars in the expenses category.

b. Make sure you choose the right option

You may have been influenced by the experience of a family member or close friend based on which you decided to consolidate debt. It should be clearly understood that every financial situation is different and what worked for a friend and/or close relative may not work for you. Therefore, always look for the factors that add to your advantage.

For example, if your credit score isn’t good, then don’t go for a balance transfer or consolidation loans.

c. Consolidate and repay bills rather than borrowing more money

Borrowing on a continuous basis for financial relief can put you in a bad condition. The more credit we get, the more we tend to spend it, thereby making debt repayment harder to achieve. What the debtor does is to get into the bad habit of creating more debt, which finally becomes harder to repay. The only way out of this callous behavior is to end it. Also, talking to a credit counselor in a non-profit credit card agency can be of great help. The essential tip to keep in mind is to focus on paying bills rather than borrowing more money.

d. Use a 401(k) loan to pay back the debt

The advantage of using a 401(k) loan is that the loans are cheaper than credit cards, the interest rate usually equals the prime rate plus one percentage point. There’s no effect on your credit score and you also have to pay interest to your own account.

However, make sure you repay the amount within a definite time so that you can enjoy your retirement benefits completely.

e. Borrow money from a family member or close friend

Turning to a family member and friend for borrowing money can be of great support. There are no credit checks involved and you may be offered a loan at a lower interest rate. However, your personal relationship with the person will be at risk; so think wisely before borrowing money from a family member or close friend. Also, make sure you repay the amount within the time as per your mutual agreement.

f. Check your credit report and scores

An error found in any of your credit reports could prevent you from taking out a consolidation loan. A debtor can take advantage of the facility to pull a free annual credit report from any of the three major credit reporting agencies, namely TransUnion, Equifax, and Experian.

By doing so, you can dispute any errors, if required, and have a blemish-free credit report. Once you know the status of your credit, you’ll have most of the information on how to consolidate your credit card debt.

Credit card consolidation is an effective strategy to get you out of debt. It can make you more organized and can save you from high-interest rate debt payments. So, what are you waiting for? Consolidate your credit card debt into one payment and see the results.


How can you reduce credit card debt which is soaring new heights?

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It is shocking to observe that citizens of the United States are struggling to swim in the pool of credit.

According to the statistics recorded by Experian’s annual study on the state of credit and debt in America, “The average American has a credit balance of $6,375, increase in nearly 3% from 2017”.

Credit card users are growing at an alarming rate. This has also increased the debt load in the past few years. The debate that rests in front of the average American is: is it healthy for the nation to remain in such a perplexing situation? What are the ways to reduce credit card debt? We will try to answer your queries in this article.

Are there any psychological reasons behind the rise of credit card debt?

If you use your credit card responsibly, it can be a proven valuable financial instrument. Credit cards are much easier to carry and use compared to cash, and it’ll also allow you to make smoother transitions over time.

However, using credit cards might be dangerous due to a number of psychological reasons. Most of the time people are willing to spend more money on an identical product when they use credit cards rather than using cash. When you compare cash and credit randomly on the basis of spending, people often spend more with credit.

Is there any logical reason behind this behavior? Yes. Credit cards not only help you to make payments easily but also act as a catalyst and boost your desire to spend more. Also, with a decent credit limit, you can get a benchmark against which you can compare the prices of the commodities. This way a good or high credit limit also lures you to spend more than what you practically need to spend.

The actual point is, we have a weird and strong psychological effect upon us when we start using credit cards. And that psychological effect is the main reason for increasing credit card bills.

A study conducted by “Drazen Prelec” and “Duncan Simester” from the Massachusetts Institute of Technology’s Sloan School of Management revealed the effect of cash and credit cards on spending. They practically conducted a survey on students and asked them to bid on Boston Celtics basketball game tickets. There were two groups and they were asked to buy the tickets using cash and credit card alternately. It found that the group of students who would make the payment with a card, bid twice the number of the amount the cash group bid.

In another recent online survey conducted by Harris Poll, more than 2,000 adult Americans were asked about credit card debt and regret. They were asked whether they’d be willing to buy things by going into debt and if they agree to do that, how come they find the motivation to pay it all off?

Here’s what the results show about the psychology of debt in Americans:

  • About 86% of Americans regretted having debts on credit cards. But in this situation also, 71% of them are willing to go into further debt to meet certain expenses.
  • More than 20% of the Americans with family admitted that they didn’t want to carry a huge debt burden like their family, and they truly regretted this.
  • 25% of Americans feel that they might get motivated to pay off credit card debt and increase their credit score. By doing so, they would become eligible to get bigger loans for buying a house or car.

Despite having so many debts on their shoulders, people are still incurring debts. Is it the fear to tackle the truth, or something else?

Is America taking credit card dues too casually?

The average American’s credit debt grew at 3% last year, resulting in an average credit balance of $6,354. The average interest rate is 15.5%, which is 300 up from the basis points over the past 5 years.

The cost of credit card debt is still increasing as consumers didn’t stop borrowing yet. As a result, the total revolving debt is measured at $1.04 trillion, and credit card borrowers made payments of $104 billion as credit card interest and fees over the last twelve months. The number is overwhelming, up 11% from 2017, and 35% over the last five years.

This has also impacted other financial sectors and led to a considerable increase in retail cards, mortgage debts, and overall debt, revealing the negligence of the general population on credit cards and other dues.

What are the steps you can take to reduce credit card dues?

How to eliminate debt with a disciplined, structured approach? Is it really possible? The answer would be yes if you follow several simple steps.

You can remain financially wealthy only when you reduce credit card debt. It appears to be a challenging process in the beginning but not when you develop the habit of following these steps to reduce the dues. Consider it a norm that will take you out of misery.

1. Calculate the exact amount of debt

Many people have a casual habit of not calculating the exact amount of debt owed to the creditors. Enlist all your credit card bills and take into account the exact amount of your outstanding debt. It is important to have an exact figure of your debt as it will help you select a suitable debt payoff strategy.

2. Keep track of your costs

Write down your expenses from petty to preliminary expense, entertainment expense, meals, etc. If you clearly keep a record of all your expenses, it will make your budget stronger. To get a brief idea of your monthly spending, study your previous year’s worth of credit card bills and bank statements. You can take the help of online budgeting software to keep track of your costs.

3. Plan a budget

It becomes hard to adjust your lifestyle a little too often but a slight adjustment made to your expenses can add up to big savings. For example, cutting down on expensive meals once in a while or replacing expensive purchases with a cheaper ones can impact your budget to a large extent.

Write down three ways in which you can cut down on your expenses and divide your monthly budget into weekly ones so that you can get track of what’s going out of your pocket.

4. Select your debt payoff strategy

You can use the snowball method to reduce debt. It clears the debt, beginning from the smallest to the largest, thus creating a momentum similar to the snowball effect. All you need to do is make minimum payments on all accounts and add a little more towards the smallest debt amount. Repeat the process until each debt is fully paid.

Other debt payoff strategies include the debt avalanche method, under which the debtor makes the minimum payment on all the credit card accounts and pays a little more towards the highest interest debt. As the process continues, the monthly amount of your debt payment will go on increasing.

Select the strategy you think is right. After all, you are your best judge.

5. Work on improving interest rates

If you have to negotiate with your creditors, use your soft skills to the best advantage while communicating with the negotiator about reducing interest rates. Even if the interest rate is lowered by a percentage or two, you are saving hundreds as you pay off debts.

Remember that your credit score has a vital role to play in lowering rates but that’s not the only factor. So the action plan that goes out to you is to call up the credit card companies and politely request them to lower the interest rate. State a solid reason behind lowering it.

6. Create solid goals to stay focused

If the debt is paid in due time, then it can open doors for you to spend on other things like vacation trips, gadgets, a new set of clothes, and a host of other things. This can happen only if you are a determined person who believes in creating concrete goals. Therefore, make a habit of writing down your goals so that it is clear for you to make future dreams happen in reality.

7. Watch your progress

If you want to refrain from excessive spending, it’s important to go through your expense history from time to time. Create an excel sheet and review the section properly to keep a constant update of your ongoing credit activity. Put reminders on your calendar to check the status of your financial situation. Track your progress intelligently. It will make you confident and grounded in your financial matters.

A word of wisdom…

It might seem like a great idea to close your card once it is paid off. But, this is not the best way. Your credit score partly depends on your credit utilization ratio. If you close the card, there will be less credit in your name. This will affect your debt utilization ratio and it’ll gradually be increased, which will hurt you in the end.

On the other hand, closing a credit card with a long credit history may also affect your score badly. So keep your credit card open, it’ll improve your score, too.

Still, wondering how to eliminate credit debt? Following these simple steps can make a huge difference. We encourage you to use more credit cards in the future which you can happily use for your benefit.