Definitely some good insight here. Thankfully I've managed to avoid debt problems personally. But I've seen them destroy some friends.
24 Signs That You Could be in Financial Trouble #11: Consolidating Debt While Still Using Available Credit
In this series I am covering the 24 tell-tale signs that you could be in financial trouble. Over the next few weeks I will be presenting these signs, how to identify them and tips on how to address the issue.
One common method for paying down debt is in the form of consolidation. This can either be done with a consolidation or home equity loan from the bank or even simply opening a new credit card and doing a balance transfer. Consolidating debt can be a great step towards eliminating that high interest credit card debt, but to be successful it has to be done with care.
The Biggest Mistake
When people consolidate their debt there is one big mistake that many make: continuing to use the new credit that was freed up with the consolidation. This is a recipe for disaster and should be avoided at all costs. What happens is that people have a hard time breaking habits. If they are consolidating debt there must be a reason there is debt to begin with. So when this consolidation now frees up more available credit these habits can creep back in and make the debt problem even worse.
To Close or Not to Close
You may think simply closing or canceling the old credit cards will be a great solution so you won’t find yourself tempted to use the card again. But, not so fast. Some important factors in regards to your credit report come in the form of length of account history and the ratio of credit used to credit available.
When you close out an account you will not only hurt your borrowing ratio but you may be eliminating years of credit history from your account. Before closing any accounts you should carefully examine your credit report to see what, if any cards should be canceled. If it is a new department store card you opened last Christmas to get a discount and had a limit of $500 it may make sense to just get rid of the card. But the last thing you want to do is cancel a card you’ve had for five years with a higher credit limit. That may do more harm than good.
How to Stop Using Old Cards
So, if you don’t want to cancel all of your old cards what can you do to ensure you don’t get into the habit of using them? The simplest and most dramatic thing you can do is to simply get a pair of scissors and cut the card up. Problem solved, the account is still open but you can’t just swipe a new purchase. Of course if this was a card for emergencies that may not be the best idea.
Some people find it useful to lock their cards up in a lockbox. If you have one at home you can do that, but an even better way that makes them even harder to get to is to lock them up in a safe deposit box at your local bank. Either way, if they aren’t in your wallet and aren’t easily accessible you are far less likely to use them.
Use Debt Consolidation Wisely
Don’t fall into the endless cycle of debt. If you are thinking about consolidating your debt make sure you stop using the old credit that you are trying to consolidate. This can be a great step towards getting rid of debt but simply continuing to use credit will just dig you into a deeper hole. It seems like common sense but leaving those cards in your wallet or even considering that open credit line as a means for buying something will just perpetuate the cycle.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.