Financial Literacy - Smart borrowing
Chris Farrell
debt
Ask why you need a loan

The problem is most of us aren't that disciplined. We won't pay off our balances at the end of the month. Our balances will end up growing, the interest on those outstanding balances will start accumulating and we'll only quickly find ourselves in trouble instead of getting rewarded. So, if you don't travel a lot, it's just much, much better for you to ignore these come-ons and instead focus upon the really important things -- the card's interest rate and annual fee, if they charge one.

q_v2.gifWhat about when you pay off all of the outstanding debt on your credit cards and you want to close all but one or two of those accounts? Can you do this without negatively impacting your credit score?

a_v2.gifWell, we do live in a time of identity theft. So, I'm a big believer in closing out those credit card accounts that you don't plan to use anymore. And yes, doing this will impact your credit score.

So the question becomes, "Will you be buying a new car or a new house anytime in the near future?" If you're not going to make a purchase that's going to require a loan, I'd just go ahead and close out all those accounts. I would get rid of every one except the one with the longest credit history.

q_v2.gifHow much credit should you leave available on that last remaining card?

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a_v2.gifIn the past, peoples' credit limits were often raised automatically. I was at a meeting of the American Economics Association a few years ago at which I attended a fascinating presentation about credit cards. And what the business had learned is that people have a level of a balance with which they feel comfortable carrying.

So, for example, if you had a $10,000 line of credit available to you and you were carrying no more than $2,000 of debt, you were comfortable with a balance of 20 percent. And what the industry had learned was that, if they then raised your credit limit to $20,000, you'd feel comfortable with a $4,000 balance. So it was much more profitable for them to raise your credit limit automatically because they could count on your raising your balance accordingly.

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