4. Spend all the way up to your limitThere are a couple of issues here, with piling up debt being the obvious problem. But maxing out your cards also has the potential to damage your credit scores. Scores are partly tied to credit-utilization ratios -- card balances compared with available credit. Max out your cards, and your utilization ratio goes up. This scenario usually results in credit scores going down.
There are also "intangibles" to think about. If you suddenly use up your credit limit, your card issuer could take this as a signal that you're in dire straits. An alarmed issuer might raise your interest rate. (Note that issuers can still raise your interest rate after the first year if they give you 45 days' notice.) And what if you suddenly need a new dishwasher? You should, of course, have an emergency fund for such unexpected expenses. But in these uncertain economic times, that's not always possible.
5. Dispose of it improperlyIf you decide you no longer want to keep a particular card, you need to do three things:
- First, make sure the balance is paid off before you close the account.
- Second, call customer service and confirm that your balance is zero. If it's zero, go ahead and inform the service rep that you're closing the account. The amount of hoop jumping at this point depends on the card issuer. But stick with it until you're sure you've closed the account. It's also a good idea to send a letter to the issuer stating that you've closed the account and to include details from the call.
- Third, cut up your card. There's actually a correct way to do this. You need to disable the magnetic strip with a strong magnet or by scoring the strip with scissors. Then shred the card or cut it into pieces. If this is a bad "breakup" with your issuer, you might even find the process a little cathartic.
This article was reported by Beverly Blair Harzog for CardRatings.com.
Published Oct. 26, 2010