(May 4th,
2007)
Dear
3DebtConsolidation.com:
I was in a financial crisis in the earlier stages
of my life that pretty much ruined my credit. In an effort to
rebuild my credit history, i took out a $300 limit credit card
that has a $6.50 monthly fee and an Annual usage fee of $150.
The interest rate charged on this credit card was a whopping 25%!
I want to cancel this credit card immediately, but if I do this,
my credit score will be negatively impacted? Remember, the point
of me taking out this credit card is to rebuild my credit history!
My question therefore is, should I cancel the card immediately,
or wait till its fully paid off and then cancel this? How will
my credit score be affected under both of these scenarios?
Dear Stephen:
Consider your scenario to that of a dating relationship
where the other party is costing you a lot of money, and you are
going nowhere with the relationship. Would you still continue
on with it? Definitely not! Apply the same analogy to your situation
and you will know the answer!
The type of credit card that you are stuck with
(the $300 limit credit card) is known as a "Sub-Prime
Credit Card." Sub-Prime credit cards carry huge
hefty annual fees with ripoff style interest rates. I assume the
$150 annual fee is taken directly from your credit card, essentially
lowering the credit limit you have available from $300 to $150
($300 - $150 fee). These types of credit cards are not really
meant to help the borrower establish his credit, they are more
like payday loans where the lender is trying to make a quick buck.
Thus, you should immediately terminate the credit card and stop
using it!
A better option for people like yourself trying
to establish a good credit history is a low or no-fee secured
credit card. This secured credit card is attached to your Savings
account, and the balance in your Savings is pledged as collateral.
Thus, if you go broke, the credit card lender can withdraw the
amount from your savings to recover his loss. In order to establish
a good credit history with secured credit cards, treat them just
like unsecured credit cards. Make necessary purchases with them
(such as grocery items) and pay them off before the grace period
ends. Once you make regular on-time monthly payments for a few
months, credit card lenders will like your creditworthiness and
offer you a higher credit limit, with lower interest rates.
A topic related to the question you asked is,
how can someone go about improving his credit score? Here are
some guidelines derived from our article on How
to Improve Your Credit Score - 4 Basic Things.
1) Pay Off Your Debts
To get good mortgage loan terms, you
need to have a credit score in the 700 - 720 range. The
expected national average is 723 according to Fair Isaac.
What's the best way to increase your credit score in the
short term? The best way is to pay off any high debt balances
on your credit cards which could increase your credit
score by a whopping 60 - 80 points overnight! Credit Bureaus
look at how you handle credit card debt, whether you try
to pay it off as fast as you can, or you are the type
of person that only meets the minimum payment schedule.
If you are determined to pay off your high credit card
balance, this will reflect on your credit score and will
net you favourable terms with mortgage lenders.
2) Never Use More than 50% Of Your Credit
Limit
If you spend more than 50% of your credit
limit every month, this indicates to the Credit Bureau
that you do NOT have enough cash on hand to meet your
monthly expenses. This will term you as a high credit
risk and will actually reduce your credit score by 60
- 70 points overnight (according to Craig Watts working
at Fair Isaac). You need to minimize your credit limit
usage and keep your credit balances owed very low for
atleast 3 months before applying for credit or a mortgage
loan.
3) Don't Close Old Credit Cards
In the above bulleted list, we mentioned
"Time Length of Credit History." If you have
credit cards that are 4-5 years older, then it's NOT a
good idea to close them down. Use those to maintain your
credit history and use them responsibly! Furthermore,
do NOT go out applying for new lines of credit at any
retail store or bank, and do not go out asking for an
auto loan, because that will decrease your credit score
by a few points instantly.
4) Ordering Your Credit Report or Seeking
Credit Counseling
Here are some myths that do NOT affect
your credit score in any way.
-
You ordering your credit report from
Experian, TransUnion or Equifax.
- You going out to seek credit counseling or
debt management services.
- Mortgage or other debt lenders checking your
credit score for any applications you have made.
