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Three Mistakes You Might Make After Getting Out of Debt
[March 23rd, 2014]
If you’ve ever had credit card debt, you know how heavily it can weigh on you. It may have felt like you would never get out of debt—that your balance due was a mountain you’d never stand on top of.
But slowly, you chipped away at that mountain of debt. Maybe you transferred a balance to a zero-APR balance transfer credit card or worked with a financial planner to create a paydown plan. Gradually, the balance become smaller and smaller until the day came when you were officially free of credit card debt.
Whether you are still in the midst of paying off your debt, haven’t yet begun to pay it down, or have already paid your credit card balances in full, three common credit pitfalls await you. Read on and find out how to avoid them.
1) Closing your credit card accounts. Many people celebrate the day they get out of debt by calling up their credit card issuers, closing their accounts, and cutting up their credit cards. They vow to never buy anything on credit again and want to make sure they stick to their promise. The problem with this is, when you close your credit card account, you cut short your credit history. Credit history counts for about 15% of your credit score, and having a good long one is an important component of a healthy credit score. The credit cards you’ve had the longest are the ones you want to hold on to. In fact, it’s a good idea to keep all your credit accounts open. The more credit you have available, the better it is for your debt-to-credit ratio. When you’ve got zero debt, the higher your total credit line, the better. So leave those accounts open and keep them in good standing. Your credit score will benefit in the long run.
2) Never using credit cards again. Not quite as bad as closing accounts and cutting up cards, butneglecting to use your credit cards can also be a big mistake. The expression “once bitten, twice shy” applies to many people who have gotten into debt and worked hard to pay it off, but they would do well to embrace the expression, “you’ve got to get back on the horse” instead. For one thing, a credit card that’s never used might be closed by the issuer—see above for why you don’t want that to happen. And f you never use credit, you’re missing out on a useful financial tool. Credit cards can help you afford big purchases that you need to pay off over time. Using a low-APR credit card to help finance your home remodel or your holiday shopping is not only smart, it can be rewarding. Try a cash back or frequent flyer rewards card and reap the benefits of credit card rewards.
3) Getting into debt again. Once you start using your credit cards again, it can be tempting to fall back into the bad habits that led to your original debt problems. Avoid this by making a budget and sticking to it. Keep track of your credit card spending and pay off your balances in full each month, unless you have a plan for paying off a high-ticket item with a low-APR card. Don’t use credit to make purchases you know you can’t afford, and don’t use your credit card as an emergency savings account.
Following these guidelines will help you have a happy, healthy relationship with credit—now and for years to come.
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