Paid Off Credit Cards – Now What Do I Do?

Lora writes in:

After careful planning and a little personal discipline, the end of my credit card debt is within sight. However, with each passing month as I approach my goal I’ve felt an uneasiness surrounding my impending victory. What happens now? Aside from obviously attempting to not fall into the trap of credit card debt again, I’m uncertain what the next best course of action would be to make my credit cards work for me rather than against me. I’ve read that not using credit cards on something of a regular basis can hurt your overall credit worthiness.

I currently have 2 credit cards:
1. low limit, but carries reward options (15.99% interest–paid off)
2. fairly high limit and no reward options (13.24% interest–pending pay off) ]

How do I know how often I should use them? Does the allowable limit of the card affect credit worthiness and would asking for a lower limit help anything? Is there any way I could possibly bargain for a better interest rate?

First of all, I’d like to congratulate Lora on working to reduce her credit card debt. Good job!

The best way to reintroduce credit into one’s life is to do it slowly. Lora could start using her credit card only for gasoline. As time goes on, she can start charging regular bills like her cable and groceries in order to take advantage of the rewards.

I don’t think Lora needs to worry much about how often she uses her card(s)as much as she needs to worry about what she’s using them for. Going shopping for clothes everyday thanks to MasterCard isn’t a good plan obviously. The best way to use credit cards is for things that you’ve already budgeted for and have saved for. Once that’s been accomplished, the credit card is just acting as a more secure and convenient payment method.

Lora should NOT ask for a lower credit rating. If anything, she should ask for a higher one as long as it won’t tempt her to spend more. Credit ratings and scores take into account something called the “debt-to-credit ratio“. Basically, you want this number as low as possible. Why? Let’s say you have a $10,000 credit limit, but you charge roughly $5,000 per month. Your ratio is 50%. But if your credit limit was $20,000, your ratio would only be 25%. Lenders often assume that a high ratio means you’re using more credit than you can handle and comfortably pay back.

Asking for a lower interest rate is a wise thing to do if you’re still carrying a balance. Simply call your bank and ask for a rate reduction. The worst that can happen is they say no. Lora’s 13.24% rate actually isn’t too bad considering some cards can carry rates of 30% – or more!

Finally, if I was Lora, I would ditch the card with no rewards. She doesn’t have to cancel it, but she can just put it in a drawer somewhere and forget about it. That’ll help keep the ratio I talked about above lower. Then, I would search for the best rewards card I could find. With good credit, Lora could try to open a Chase Freedom with offers up to 5% cash back. Remember that interest rates should be irrelevant because you won’t be carrying a balance anymore.

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