Can't Afford Vacation?
Today a woman in my bank came in to ask for an increase in her credit line. Why? She wanted to go on vacation and didn’t have enough money. The shocking part was the banker’s response. “How about we open a loan to pay off your credit card, and we can give you some additional money to use for vacation.”
This manner of managing debt has baffled me for a long time. I understand the arguments that:
- The loan may have a lower interest rate
- You consolidate payments into one monthly payment
However, it seems like a gamble for many more reasons. The woman in the bank needed a credit limit increase because her credit card was maxed out. Many people who call for debt consolidation help tell us that when they obtained a loan to pay off their credit cards, their intention was to close and not use the cards anymore. The reality is that they did and now they owe twice the debt and have to make twice the payments. Neither result is good for someone’s credit or pocket book.
The only way to get out of debt is to pay it off and not charge more than you can afford to pay off, monthly, on credit cards. Having good credit is critical in our society, but that does not equate to having debt. You can have both good credit and little-to-no unsecured debt (credit cards, store cards, etc.).
Tips for Keeping Good Credit Card:
- Use it – sparingly
- Only charge what you can afford to pay off each month. This may mean you use it to pay your standard bills – electricity, cable, etc. – and then pay the credit card off. You are using the card and building and maintaining a perfect payment history
- Only have two-to-three credit cards open and in use
- Keep the balances on cards below 30% of the credit limit
- Avoid frequent credit applications (one-or-two every 24 months)
- Pay off debt rather than moving it around (balance transfers, debt consolidation, etc.)
So, back to the woman in the bank. She has an opportunity to start improving her credit by leaving her credit card alone and focusing on repayment of the new loan. Moving forward, it would be extremely important for her to set money aside in savings. This way, when she wants to go on vacation, purchase gifts, get new tires or any other extra expense, she will have the money and not have to rely on a bank.
Before you make a decision on consolidating debt talk to someone who can help you explore all of the options for getting out of debt. Call a certified credit counselor today: 1-888-282-5811.
Published Jan 5, 2012.