Although serious consumer debts don’t always stem from credit cards, it is advised that you avoid applying for any type of credit until your bills are under control. Even if you are able to pay all of your creditors each month, your debt to income ratio will be too high for you to qualify for a new credit card. In the event that you are approved for a credit card when you already have a substantial amount of debt, you will likely receive a very high interest rate.
Since many consumers that have serious debt have accounts in collections, the Federal Trade Commission advises you to keep in contact with your creditors rather than to risk further damaging your credit report. While being in a lot of debt does not necessarily indicate that you will be sued or need to file for bankruptcy, the absolute last thing that you will want to do is to start applying for new credit cards.
Credit Card Mismanagement Leads to Higher Fees and Interest Rates
Many credit cardholders are able to keep their utilization levels low and pay more than the monthly minimum, but this is not the only cause of credit card mismanagement. Since many credit cards come with introductory interest rates, bonus rewards and other incentives, it can be easy for a consumer with a good credit score to be approved for several new credit cards within a few months.
Having tens of thousands of dollars in credit available to you will do wonders for your credit report. On the other hand, it can be tempting to max out all of your lines of credit during times of financial difficulty. Another way that consumers mismanage their credit card bills is by failing to make on time payments.
Making a few late payments can cause your account to be converted to the default interest rate and you will also be responsible for paying additional fees.
Credit card mismanagement can happen at just about any age, but young adults are far more likely to misuse their available lines of credit than their older counterparts are. Your credit card balances can quickly grow to be unmanageably high when late fees, convenience charges and over-the-limit penalties are being added on each month.
Too Much Credit Card Usage
Too much credit card usage leads to bad credit. When you already have more debt than you can imagine, each subsequent credit line that you open will come at a cost. It is ideal to have several credit cards with high credit limits, but you do not want to max them out. Additionally, you risk experiencing credit card interest rate changes when your creditors see that you are not managing your money properly. In an instant, your credit card debt can become unmanageable, your accounts can be closed, and your credit score can suffer because of too much credit card usage.
The Federal Deposit Insurance Corporation provides consumers with resources to help them access their annual free credit report as well as explains how credit scores are calculated. By understanding how you should ideally use your credit cards, it will be easier for you to pay down your debts.
Credit Cards and Credit Rebuilding
When consumers are struggling to pay their mortgages, student loans, car notes and other bills, they should not use their credit cards as a backup source of funding. Applying for credit of any kind is also advised against. However, when consumer debt because more manageable after bankruptcy, debt consolidation or some other form of credit repair, using credit cards can be beneficial. In fact, new credit cards can help you to quickly improve your credit score if you are utilizing them wisely.
You do not have to close your existing credit cards if you are in a lot of debt if you are able to formulate a definitive plan.
If you are not able to make your minimum monthly credit card payments, you may be able to qualify for an income based repayment plan that significantly reduces your interest rate and lowers your monthly payment amounts.
Credit cards are commonly used for credit rebuilding purposes because they are one of the easiest types of credit to be approved for. Mortgage usually requires a fair credit score along with a sizable down payment and auto loans can come with a high APR if your credit score is low. If you are currently trying to reduce your debt, avoid applying for a new credit card until after it is under control.
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