If you are moving back in with your parents, you are probably doing it largely due to cash flow problems. The problem? Too much money flowing out, and not enough flowing in.
Most of us have too much debt (student loans+credit card debt), and we have major regrets about this debt. After college, one of my first major decisions was to pay off my debt and to never get back in to another financial situation like this. The first thing I did was to come up with a plan to start paying off my student loans. The second thing I did was cut up my credit card, and vow to never use it again.
The first decision was a smart one, and the second one was a huge mistake. Luckily, I learned that it was and successfully got my credit card reissued. Here's why:
My credit score.
If you have a poor history with credit card payments, then you need to keep using them to improve your poor credit. The worst thing you can do for your credit is to have a year or two of late payments and maxed out credit, and then pay them off and never use them again. This signals to the credit agencies that you are not to be trusted. This will destroy your chances of ever getting a car loan, a home loan, a business loan, and possibly even another credit card.
So instead, I vowed to pay off my credit card, and then only use it to pay for expense: gas. Then each month, I will pay it off completely before any interest is charged. In a year or so, my credit will be much improved.
No matter what you do, don't call up and cancel your account. This will make your credit even worse, and your balance will go straight to collections.
Here's a breakdown of credit score from Studentomics.com:
35% Payment history. Your ability to make credit payments when you’re expected to.
30% Amounts owed. How much credit you owe compared to how much money is available on all of your accounts.
15% Duration of credit history. How long have you had credit available to you? How long have you been paying your credit card balance off on time?
10% Recent credit. The amount of new credit available to you compared to credit that you’ve had in the past. Closing down a credit card can affect your credit score in the short term at this level.
10% Sources of credit. This is based on the different types of credit that you have used over the years.
If you are still tempted to use your credit card, keep it at home, in a sealed envelope in your filing cabinet. Some people even keep theirs frozen in a block of ice in the freezer.
Just whatever you do, don't cut it up and cancel your account. Your future self will thank you.
What has your experience been with credit cards?
Let me know in the comments.
Good luck!
Philip
Why do you keep track of you credit rating so much?
ReplyDeleteNow in days, with so many people defaulting on credit card and student debt I feel like FICO credit ratings will be meaningless.