Financial Facts: Credit card debt – friend or foe?
January 5, 2013
Consolidate your debt, eliminate your debt, live debt free, new lower interest rates, roll all your debt into one credit card. We all have seen these ads that promise to get you in terrific financial shape with little effort on your part and then your life will be fine and dandy. Sounds great at a brief glance, but it really may cause you more problems than you were in before.
First off, not all debt is bad. Having a mortgage debt may mean you own real estate and you are building equity. It also means that you will have mortgage interest to deduct at federal tax time, and that too is good.
Having a credit card or two is also good, especially if you pay them in full each month.
Every month, as you pay your bills on time, it builds your credit history. By paying your bills on time, your credit scores should rise; and when it comes time to buy a new home, the mortgage process goes much quicker.
But do not fall into the trap that some credit card companies and second-mortgage lenders offer. Some of these companies are less than honest when they advertise financial freedom and a debt-free future.
Keep in mind that like all businesses, they are in business to make a profit. They provide a service that may or may not really benefit you, but they do charge for their service. And I do believe that these businesses will all say that it is not their business to tell you exactly how their service will or will not benefit you.
As a consumer it is fully your responsibility to investigate the services offered to you and you need to make the final determination as to the benefits you may derive by using the service.
So, with all of that said, here are my thoughts on how you should structure your debts and credit situation. First and foremost, have no more than three credit cards. Generally three name brand cards, such as a Visa, MasterCard and Discover will be accepted in most all places of business. Having more than three does give you the potential of more debt, but that is the only thing that it does give you. The credit reporting companies start lowering your credit scores when you have more than three credit cards, especially if you carry balances on all of them.
The second item you need to know is that the longer you have a particular card, the better your credit score can become. I carry two cards and I have had them in excess of 15 years. I know for a fact that my credit score has improved over the years as I have paid the debt on time and have not applied for every credit card that offers some minor incentive.
If you have more than three cards, I suggest that you pay off and cancel the specialty ones and stick with the name-brand cards. Call the 800 number on the cards that you want to cancel and ask that the account be cancelled and a letter be sent to you that document the closure. You can then pay the debt as you are billed, but the temptation to continue using these cards is eliminated.
Plus, do not pay one credit card debt by transferring the debt to another credit card. This just postpones the payment and the credit reporting companies can track this activity and it lowers your scores.
Your small amount of work now can pay off when it comes time to buy a home, car or boat, or any major purchase.
For answers to your mortgage related questions call Bob Kieber at (970) 453-4700 or email him at email@example.com. Bob is a local mortgage lender with Centennial Bank. He has 30-plus years of professional experience in real estate, finance and investments, and is a longtime resident of the High Country. Member FDIC, Equal Housing Lender. NMLS Bank #401640 Broker #289610. For tax benefit information please consult with a professional tax advisor. The opinions expressed are those of the individual, and do not necessarily reflect those of Centennial Bank.