Credit Card Gridlock
By Ryan Healy | November 29, 2007
Is it always good to “snowball” your debt? To pay minimums on all your cards but one, to which you apply all your excess funds?
In most cases, “snowballing” your debt is a good idea. But in some cases it is not. Let me explain.
If all of your credit accounts are carrying a balance, you are in a vulnerable position. Chances are, your creditors will take advantage of your poor financial situation and jack up your interest rates to absurd levels. But you will be in no position to negotiate lower interest rates.
Without being able to negotiate lower interest rates, you may face higher monthly minimum payments. And you may find yourself falling more behind every month.
In a case like this, I feel it’s better to pay down each line of credit with a payment higher than the minimum due. This is because your credit score is based partially on your debt to credit ratio. In other words, how much debt you are carrying based on how much credit you have available.
This is done on a global basis and a card-by-card basis. For instance, if you have one particular card that has a $15,000 limit and a balance of $14,200, that is going to negatively impact your credit score. And the lower your score is, the less leverage you have.
By reducing your balances across the board, especially those balances that are near the limit, you will probably improve your credit score. This can lead to zero interest offers and reduced interest rates, should you ask for them.
I personally dislike being in a situation of “credit card gridlock”–where your creditors have you by the nose and can do just about anything they want. I prefer to have some negotiating room. This is one reason why “snowballing” your payments may not be the best way to start reducing debt.
Perhaps you will want to improve your credit score during the first few months, then move to a plan that involves “snowballing” your payments later, after your credit score has recovered.
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Topics: Credit Cards, Debt |
November 30th, 2007 at 11:44 am
You are right on here, Ryan. I was getting NOWHERE with my accounts when I had several accounts open. Sometimes it really does pay to get rid of the smaller ones or to reduce those that are very close to the limit. Debt consolidation isn’t for everyone, but it really helped me get out from that trap.
It feels great to have some bargaining power with the creditors plus reducing interest rates will save you time and money in the long run.
November 30th, 2007 at 5:06 pm
Thanks for sharing, Amanda. I’ve also found that having at least one line of credit with a zero balance to be helpful. Usually, they’ll make you low-interest offers to get your business back.
In the end, you’re just shuffling money around, but it gives you the negotiating leverage you need.