Credit Cards You Really Don’t Want to Cancel

As the economy continues to struggle, and President Obama continues to push for new credit card legislation, many Americans are committing themselves to paying off credit card debt. What many do once a card is paid off though, is to cancel the account completely to avoid getting into debt again. While it’s a reasonably good idea for debt management (particularly if you are someone who has trouble resisting the temptation to use a credit card when it’s in your wallet!)Sometimes though, canceling credit cards is not in your best interest – if you take into consideration the fact that closing credit cards lowers your available credit and increases your debt utilization percentage and may negatively affect your credit score, that is. Here are some credit cards that you are probably better off keeping active (even if you don’t use them) instead of canceling them:

Credit Card With the Lowest Interest Rate:  even if you plan to stop using credit cards and switch to a cash-based financial situation, you should keep your credit card with the lowest interest rate open. You just never know when you may need access to additional funds and if you need to use a credit card, you want one with the lowest possible interest rate.

Credit Card With Your Best Payment History and/or Longest History: Your FICO score is calculated based on a number of factors. 35% of your score depends on your payment history. If you have a credit card that you have always made your payments on time, you may want to keep that card open and active by charging a small amount every few months and paying it off. This is true also with a credit card that you have the longest account history with. The length of time you’ve had credit makes up 15% of your FICO score calculation – so if you go and cancel accounts you’ve had for years and only keep a recent account open – you’ll see your credit score drop because you’ve shortened your credit history.

Your Primary Bank Credit or Debit Card: if you have a credit or debit card through the bank which you hold your main checking and savings accounts with, you probably want to keep it open. Chances are, your checking account relies on this card as the overdraft protection, and you don’t want to eliminate that if you can avoid it. Many debit cards through banks are offering rewards programs now, at no cost – so it may be worth looking into the features of the program and trying to use your debit card more often to take advantage of it.

Credit Card with the Highest Credit Limit:  another credit card you might consider keeping open instead of canceling is the card that offers the highest credit limit. Hopefully this card is also the one with the lowest interest or best payment history, but the idea is if you keep your highest credit limit card open even after it’s paid off, you’ll have a lower debt utilization percentage. It means you are using less of your available credit and that will help keep your FICO score higher than if you closed your highest credit limit account and reduced your available credit.

It’s common for individuals who have had credit card debt for awhile to want to close all of their credit card accounts the moment they are paid off. Unfortunately, closing accounts can have an adverse affect on your FICO score and actually cause you more problems down the road if you should need credit in the future. It’s better to learn responsible credit card use; or simply keep some of the accounts open and not use them than it is to cancel all of your credit cards.

Credit Card Protection Plans: Valuable or Waste of Money?

In previous years, whenever someone was approved for a credit card they would be asked to purchase “credit insurance”. Most people declined the coverage. These days, it has been re-packaged and labeled a credit card protection plan. Are they worth the extra money each month or is it just another way for credit card companies to make money off cardholders?

Coverages: the particular coverage of each credit card protection plan may vary from card to card, so you will want to take a close look at what is covered under the plan to make your decision. Most of the time, coverage will activate if you become disabled and can no longer work; or if you lose your job. If eligible for coverage, interest will not accrue on your balances, late fees will be disabled for a certain period of time, and you won’t be required to make payments. (You also can’t use the credit card during this time period). You pay for the protection plan each month as part of your credit card bill – typically a percentage of the balance and if you aren’t carrying a balance there is no fee.

Watch Out for Eligibility Requirements: While it seems like credit card protection would be a fabulous deal if you should lose your job or become disabled, it’s actually very difficult to put in a claim for coverage. For example, if you are unemployed when you start the plan – you won’t be eligible. If you quit your job or otherwise leave it voluntarily, you won’t be eligible. If you are self employed, you aren’t eligible for the protection plan. If you are a full time employee and have the plan, if you should become laid off there is a 30 days or more waiting period before you can file for your protection plan coverage; and even then you have to prove that you have applied for unemployment benefits.

Fees for Credit Card Protection Plans: On average, the fee is fifty cents per $100 of your balance. Some credit card companies have increased the fee to double that amount. The more you charge, the more you pay for the coverage – and guess what else? Credit card protection plan fees are added to your credit card statement just like a purchase, and so the amount is subject to interest and penalty charges just like any other purchase.

Hard to Collect: As mentioned previously, not only is it hard to prove your eligibility for credit card protection plans, you may find that even after years of paying on the policy that they deny coverage or cancel the plan when you try to put in a claim. Many reports of individuals with the plans have expressed problems using their policy benefits. State Attorney General Offices are inundated with complaints about credit card protection plans, but there is no state regulation for these policies so there is little or nothing that they can do.

Many financial experts argue that you will have more benefits through purchasing your own insurance policies that also cover your credit card bills, rather than using the credit card protection plans offered through your credit card accounts. The premiums are typically lower, the insurance companies are more reputable, and you can work with a local agent to find the best combination of coverages and financial advantages for your unique situation.

5 Tips for Dealing with Credit Card Debt Collectors

If you’re out of a job and behind on your credit card payments, it might be very tempting to stop taking calls from your credit card issuer and their collection agency. But that’s not the best way to handle things. Even if you don’t have a penny to give them, it’s a bad idea to ignore the problem and hope that it will go away. Here are five tips to remember when you pick up the phone and get in touch with your credit card issuer.

Tip 1: They Don’t Know What You Don’t Tell Them

As unlikely as it may seem, banks do want to work with their customers. Many have instituted special programs for customers who are behind on their credit card debt and facing tough financial times. Call your credit card company – preferably before you default, but definitely if you can’t make payments – and see what they can so for you. If you simply stop paying, they won’t know that you’re facing special circumstances.

Tip 2: Tell It Like It Is

Tell the collector that you’re unemployed and cannot afford to make payments at this time. That’s really all they need to know. If they push you to set up a payment plan, cut in and tell them you’ll call back when your situation improves.

Tip 3: Keep Written Records

Make a note of the date and time when you called. Also take down the first and last name of the person you spoke to, and a summary of what was said during the call. If any collector harasses you or does not adhere to the rules for debt collection, keep records that you can refer to if you decide to go to court.

Tip 4: Plan for the Future

Right now, getting an income is more important than setting up a payment plan with a creditor. Of course, late payments and closed accounts will hurt your credit score, but sometimes you have to make hard choices. Focus your energy on finding a new job rather than fighting with debt collectors.

Tip 5: Pay What You Can Afford

When you’re back on firm financial footing, call the collection agency and make an attempt to settle the debt. Some will settle for pennies on the dollar. Others will resist your efforts to negotiate a lower pay-off. Offer them a lump sum or monthly payment amount that you can reasonably live with. If they refuse, get a qualified credit counselor to deal with them.