By STEVE BUCCI
bankrate.com
November 21, 2005
- Dear Debt Adviser,
I need your advice. I had a balance on a credit card for $2,800 and the interest rate was 12 percent, so I decided to transfer that balance to a different credit-card company with a lower interest rate. But when I received the credit card and information pertaining to the balance transfer, I was only given a credit limit of $3,000, and now I have this credit card almost maxed out. I need your advice on what to do so I don’t get myself in trouble with this credit card, and also I’m worried that this may affect my credit score.
- Nelson
Dear Nelson,
Three different things are in play here. Let’s look at each of them, and I believe the answer of what to do will be clear.
First, you have a new credit card and a lower interest rate. When you make a wish, it pays to be specific, or you may get an Aladdin-like surprise. You have the better interest rate you wanted; however, you should have asked what the new limit would be before you made the transfer. The low limit will change when you show progress paying down the debt. Remember, you’re not just a new customer to the creditor, you’re a new risk. They may not be comfortable giving you much more credit until you show you can handle what you have. Both they and I are wondering why you have a $2,800 balance and why you want to lower your rate rather than pay it off.
Second, your credit score has taken a hit already. Your credit score generally means your FICO or Fair Isaac score. It is made up of five main factors, three of which you may have just triggered. You applied for new credit, 10 percent of your score, and while the amount you owe has not changed, you now have a credit line that is heavily utilized, 30 percent of your score. As you pay the account down, your score will improve as the proportion of the credit line used drops and also if they raise your limit. Your interim goal is to get the balance down below $1,300 (50 percent of your max from your current 93 percent). If you closed your old account, you may have also affected your length of credit history, 15 percent of your FICO score.
Third, you now have greater incentives to pay down the $2,800, and it should also be easier. With this lower interest rate, the desire to improve your credit score and some unexpected encouragement from Uncle Sam, you have the chance to make more of your payments count toward principal instead of interest. Under government rules, minimum principal payments will rise on credit cards by the end of this year.
You need to find a way to pay back $1,300 or more as quickly as you can. Here are some tips to try:
Stop charging.
Get a budget. By finding out exactly where you are spending your money, you may discover areas where you can cut back. Be sure to include some savings to lessen your reliance on credit for emergencies.
Cut out the extras. Look at what you are spending on nonessentials such as premium cable TV, eating out too frequently and entertainment expenses. I’m not saying get rid of them, but take a good look at how much you are paying and for what. You may discover you can do without three-way calling or that morning latte.
Always pay more than the minimum.
Pay your bills on time. The last thing you need to do is pay a late fee. Not only will you be out money you could have used toward your debt, you could see an increase in your interest rate that will make your original 12 percent rate seem like a bargain. And also, your on-time payment history is the largest factor, 35 percent, in your FICO score.
Good luck!
(Steve Bucci is president of CCCS Credit Advisors. Visit www.creditcounseling.org or call 877-311-2227 for additional debt advice. The Debt Adviser is a weekly feature of bankrate.com. Distributed by Scripps Howard News Service.)