The following article is brought to you by Travis Holmes.
Credit cards are open lines of revolving credit, often charging high interest rates and tempting the consumer to run up a high amount of debt without really thinking about it. By the credit card companies own admission, this form of credit is not meant to be used often or extensively, and no one should carry a debt.
When facing a situation where you are carrying credit card debt, it is vital to find ways to pay as little interest as possible, without doing anything to damage your credit score. One of the better ways of handling this is to transition the debt to a personal loan, and close all but the oldest credit card account you have. Here are a few reasons why you should do this.
Lower Interest Rate
Credit card companies can often charge over twenty percent in interest. This can result in the average consumer spending a great deal of money in maintaining a debt, rather than paying it off. Over the long haul, having to spend money on interest decreases the fiscal strength of the borrower and actually increase the amount of debt carried.
A personal loan has a fixed interest rate, and since it is not a revolving line of credit it is impossible to add new principal to it. In short, it is a one-shot deal, with limited interest and a payment plan that is predictable.
Take note not all loans will have a lower interest rate. Some quick loans might be good for your situation but may carry a higher rate. It’s best to verify the rate and do the math yourself.
One Line of Revolving Credit
By closing out all but the oldest credit card account, the consumer is doing two things. The first is limiting the potential for future debt, by decreasing the amount of available credit at any given time. Since you will have less free credit to utilize, it would be harder to make impulse purchases that land people in debt to begin with. This article helps you weigh the pros and cons of both.
The second reason for keeping the oldest account open is to take advantage of long term credit on the consumer’s credit report. A credit report is only as strong as the oldest item on it, so it makes more sense to keep a credit card in play if the consumer has had that account for several years. Doing so can reduce the amount of interest paid on other forms of credit, including the personal loan.
Additionally, having an open line of credit is a good thing in an emergency. It can provide an emergency cushion if you encounter an expense that you cannot fit in your monthly budget, but can pay over the course of two or three months. This becomes less needed as the consumer starts saving money, but starting out this flexibility is crucial.
Transitioning debt from a higher interest rate, revolving account to a lower interest rate, closed account, can serve as a way of lowering the amount of hard earned money wasted on interest.
Doing so can set the stage for a better, more stable financial future as long as certain steps are taken at the same time. Eliminate most of your open credit, in order to limit potential exposure to negative forms of debt. Start putting back the extra cash each month, to provide a means of paying for emergency expenses without having to turn to credit.
A personal loan can be invaluable when trying to improve one’s fiscal health. By taking the time to formulate a plan, it is possible to create a system that will lead the consumer to a better and more stable financial future. All it takes is the ability to take advantage of the lower interest rates.