1. Don’t make your credit card company “twitchy” – Consistency is the name of the game. Don’t make any sudden moves like charging a new car to get the miles or suddenly opening a bunch of new credit lines (car, consumer, and mortgage). Your credit card company periodically runs your credit rating. It can be yearly, more frequently or never. It’s random. Stay consistent with your spending, amounts and types of credit you have. Credit card companies can limit or cancel your card if they perceive increased risk even if you pay the full balance off the next month.
2. Don’t worry about your rate changing on existing debt – As a result of the Credit CARD legislation that passed in 2009, credit card companies cannot raise your rate on existing debt except under three circumstances: 1) a promotional rate expires; 2) you are more than 60 days late with a payment (missed 2 payments) or if you have a variable rate credit card and the index it’s tied to has changed. Remember, it can be raised at any time with 45 days notice on your future balances for ANY reason or no reason at all.
3. Don’t pay down big chunks suddenly – Credit card companies sometimes practice a strategy called “chasing the balance” where they decrease your credit limit (the total amount you can charge on that card) after you pay down a big chunk of it. They are worried about “increased risk to ability to pay.” Say you have $5000 credit card balance that you’ve had for months, and you get your bonus. You pay off $4000. Your credit limit was originally $7500 and after you paid most of it off, your credit card company cut your limit to $1000 (which happens to be your balance).
What you should do is take the $4000 and put it in a separate account. Every two weeks, send a check to the credit card company of $500 or $1000 until you have paid the whole $4000 down. They don’t get nervous about that. I know, you are paying interest for the few months it takes you to pay it down, but that’s the price you pay to keep your credit limit at $7500. Unfortunately, chasing the balance is legal.
4. Don’t carry a balance because you think it helps your credit score – the best thing for your credit score is to charge items, preferably about the same amount each month and pay it off every month. Charging and paying helps your score, not having revolving debt – no matter how low the amount is.
5. Don’t cancel credit cards even after they’re paid off (this is the one I’ve done) –You paid off a few cards or you just never use them. You have one and it’s enough because you don’t want to carry revolving debt anyway. To guarantee it, you cut up the other cards, but it’s better to keep them. If you have a life change (divorce, job loss, etc.) you may not be eligible for more credit if you need it.
It will also affect your credit utilization (CU) score – the amount of debt you have divided by the amount of credit available to you. If you have $3000 of debt and 2 cards each with a $5000 limit, your CU is $3000/$10,000 or 30%. If you cut up one card, your CU score is $3000/$5000 or 60%. Your credit score is lowered because your CU, which makes up 30% of your overall credit score, is higher. Keep the cards, charge something small every once in a while ($200 every 6 months or something like that) and pay it ALL off immediately.