Should I Get a Loan to Pay Off Credit Cards?

Question: I have about $4,500 on one of my credit cards, the other is paid off. I keep struggling to pay this off because of other unexpected expenses keep getting in the way. I save 3 percent of my salary in a 403(b) plan for retirement and put $70 a month aside in a regular savings account. All of my bills get paid on time. I have a good credit score of 759. Lately, I have been getting offers for a loan up to $40K to pay off expenses. At one time I used Prosper and I did pay them off, and I’m in good standing with them. Should I take them up on their offer again to pay off everything that I have and just keep the one company to focus on? Some of the interest rates on what I have are at 4 percent, 7 percent, 11 percent, and 16 percent. Maybe I can get another loan at 12 percent if I borrow 40K. I’m just so confused. I want a zero balance with everything, and it’s just taking so long to get there.

Angie O. in Connecticut

Steve Rhode, the Get Out of Debt Guy, responds…

Hi Angie,

There are a few different approaches to tackling this. All have valid pros and cons. So, let’s take a look and some different things you can do to jumpstart your debt payoff strategy.

Using a debt consolidation loan to pay off your credit cards

Consolidating debt into a loan simplifies things because it gives you one payment to make. That way, you can stop juggling bills. Your excellent credit score will determine what the interest rate on your consolidation loan will be. Then you’ll need to do some math to see if the interest on the loan and the benefit of the one payment are a better value than what you are currently dealing with.

When evaluating the benefit of taking out a new loan, you want to look at two costs:

  1. Monthly cost
  2. Total cost

You’re currently making all of your monthly payments, so a lower monthly payment may not be needed – as long as you’re paying something comparable to what you pay on all your individual bills now, the loan will work for your budget. The main thing you want to assess is the total cost of the loan. Will the total interest charges over the life of the loan be higher or lower than the total interest charges on all your debts paid off individually?

Get free quotes from top debt consolidation loan providers now, so you can decide if this is the right solution for you.

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Focusing on motivating payments first

I find that most people enjoy paying off debt fast and the math is secondary. In other words, you’re finding it hard to stay motivated to pay off your debt because you’re focused on that biggest balance. This can make it hard to stay the course because you don’t feel like you’re getting anywhere while you chip away at that large balance.

If this is the case, focus on paying off your lowest balance debt first. Then roll those now extra funds you would have paid on that debt into the next lowest balance. This approach will knock off creditors and let you focus on fewer and fewer individual accounts.

Exploring other options for debt relief

I recently wrote a big post on debt consolidation. The post goes into greater detail on more issues to consider.

Overall, I’m very impressed with your approach and progress. You are taking smart steps to save and invest in your retirement while you’re reducing your debt. You are ahead of 90 percent of people with this approach. Reading your current strategy put a smile on my face.

One word of warning, not all loan offers you receive in the mail are created equal. If the “lender” is not a mainstream name you recognize, examine the offer deeply. You can see other similar mailers people have received, here.

Don’t waste another sleepless night worrying about debt! Let Debt.com connect you with professional debt help today.

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Does Age Affect Credit Score?

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Question: My credit score is 658. I have no credit cards, mortgage, or other loans — although I’ve had all of those in the past. I work full-time for $30 per hour, get Social Security retirement, and have about $10,000 in a 401(k). I like to travel and expect to live another 20 years. I see all these credit cards with rewards travel points, but I never seem to qualify for any of them. Am I too old to tweak my credit score so that I can qualify? – Janet in California

Laura Adams, author, and host of Money Girl podcast responds…

Thanks for your question, Janet. The short answer is no, you’re never too old to improve your credit! There are no downsides to building better credit — only many upsides.

Even if you weren’t interested in qualifying for a credit card, having better credit could improve your financial life in many ways, including:

  • Lower auto insurance rates. Insurance is regulated by states, so the rating rules vary depending on where you live. While no state allows credit to be the only factor in setting auto rates, most use it as a factor in determining how much you pay.
  • Lower home insurance rates. Just like with auto insurance, insurers use credit when setting rates for home, condo, and renters’ policies. Again, no state allows credit to be the sole factor in setting home insurance rates.
  • Approval to rent a home. Most landlords, property managers, and leasing companies check credit as part of the application process to make sure you’re likely to pay rent on time. If you have poor credit you may get turned down to lease or have to pay a larger security deposit.
  • Less expensive utilities and cell phone contracts. Having poor credit means you might have to pay a hefty security deposit for utilities, such as water, gas, power, and cable. Cell phone companies also check credit when you apply for a new contract to make sure you’ll pay their bill. If you don’t have good credit you may be charged higher rates or not qualify for top-tier wireless plan offers.

 This isn’t a complete list of all the ways credit affects your finances. The main point to remember is that when you build credit, not only do you become eligible for credit accounts, but you also save money and improve your financial life in other ways.

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Common misconceptions about credit scores

A common misconception about credit is that if you have no debt, you must have good credit. That’s completely false. In order to have good credit, you must have active credit accounts and use them responsibly.

Unfortunately, having no credit is the same as having bad credit. A “thin” credit history means you don’t have enough data in your file to generate a credit score. Without a credit score, lenders and merchants have no way of evaluating how likely you are to repay your bills and are likely to deny you credit.

It can seem like a catch 22. You can’t build a credit history without a loan or credit card, but you can’t get one without having a good credit history! Fortunately, using a secured credit card the right way is an easy way to build credit. There are also credit builder loans that are specifically designed to help people with bad credit build their way to a better score.

What is a secured credit card?

A secured credit card is similar to a regular, unsecured credit card in many ways:

  • They look the same.
  • They can be used to make purchases at the same stores.
  • They require a minimum monthly payment.
  • They charge interest if you don’t pay off your balance in full by the statement due date.
  • They may charge an annual fee.
  • They may offer a variety of benefits, such as fraud coverage, price protection, extended warranty, or travel accident insurance.

The main difference between a regular and a secured card is that you must pay an upfront deposit because it reduces the issuer’s loss if you don’t pay your bill. The minimum required security deposit varies depending on the card you choose. Some issuers may only require $50, but others may ask for several hundred.

If you deposit $300 on a secured card, your total charges can never exceed that amount. However, if the card has an annual fee, it may be taken out of your deposit.

For instance, if you put up $300 and have a $50 fee, your credit limit becomes $250 for the first year, $200 for the second year, and so on.

How a secured credit card helps you build credit

The major benefit of a secured card is that some, but not all, cards report your payment data to one or more of the three nationwide credit bureaus: Experian, Equifax, and TransUnion.

But don’t spin your wheels with a secured card that doesn’t report your payment history to at least one of the bureaus. A history of making on-time payments — even if they’re just the minimum payments — helps you build credit quickly. After you use a secured card responsibly, the issuer may offer you a regular card.

Remember that you never need to carry credit card debt to improve your credit. It’s true that you must have credit accounts and use them to build credit. However, you can pay them off in full each month. That’s the best strategy to avoid paying credit card interest and build credit at the same time.

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What is a credit building loan?

A credit building loan is another useful tool for building credit. It’s basically a self-loan that you make online through a company like Self Lender. It helps you build credit and gives you a useful way to increase your savings at the same time. You take out a loan and the funds are used to open a Certificate of Deposit (CD) that grows with interest over time.

Then, you make payments to pay the self-loan back. Companies like Self Lender report to the credit bureaus just like a traditional lender. So, you build positive credit history and receive your money back with interest added once the CD matures.

How a credit builder loan helps you build credit

Just like secured credit cards, credit builder loans are designed for people who need to build credit. So, you can qualify even if you have a bad credit score or no credit score because you’ve been living without debt.

As long as you make all the payments on the credit builder loan on time, you build a positive credit history. You also improve the mix of credit that you have if you have a secured credit card and a credit builder loan at the same time.

Learn more about what makes up your credit score »

What Is The Fastest Way Possible to Improve My Credit Score?

Question: Five years after college, I finally got a job with a decent salary. So now I’ve been able to handle my student loans and even pay down some of my credit card debt. I met a great woman, and we want to buy a house next year. Her credit score really stinks, though, so we need to use mine. (She has two collections on her credit report, one that’s paid off and the other she’s paying now.)

But I’m only at 692. I want to get it into the 700s or even 800s. I’m thinking of taking out some more loans and paying them back immediately, because I heard that can help. Or doing the same thing with credit cards. But what’s the fastest way to improve your credit score?

Kenny in Michigan

Howard Dvorkin, Debt.com Founder and CPA, responds…

I admire your focus and drive, Kenny. Even with unprecedented access to credit scores – something you couldn’t easily do even a few years ago – Americans tend to be apathetic about looking up their scores, much less improving them.

That said, your credit score of 690 isn’t bad. Literally, it’s considered “good.” Credit scores range from 300 to 850, and they traditionally break down like this…

  • 300-629: bad credit
  • 630-689: average credit
  • 690-719: good credit
  • 720 and up: excellent credit

So improving your credit score in a year is definitely attainable. First, however, you need to learn how that score is decided – because some of the ideas you floated above will actually hurt your score.

The five factors that impact your credit score

Your credit score is split into five sections, and not all of them are equal. In fact, two dwarf the others.

The biggest chunk (at 35 percent of your credit score) is your “payment history.” That simply means how often you pay your bills on time – and how often you’re late. Simply put, paying your bills before the due date will hike you score more than anything else.

Along those lines, the second-biggest chunk (at 30 percent) is “credit utilization.” That’s just the fancy way of saying: How much do you owe on the credit limits you have? If you max out your credit cards, your score will be lower.

Next up, at only 15 percent, is “length of credit history.” Lenders love to see that you’ve had loans and credit cards for a while, and that you’ve been paying them regularly and early. So if you’ve had a credit card for years, keep it.

There’s “new credit” and “credit mix,” each at 10 percent. You want to avoid opening many new lines of credit, because that looks like you’re in financial trouble. Credit mix is a much more vague category but usually means you have a credit card, an auto loan, and maybe a personal loan – because many lenders figure this shows you can deftly handle whatever payments you need to make.

The best way to raise your credit score

As you can see, taking out some loans and paying them back immediately won’t really make a dent in our score. First, you’ll be dinged for taking out a lot of “new credit,” and while you’ll earn a few points for paying them back – your “payment history” – it’s important to look at everything else going on in your financial life.

My suggestion? Pay off your credit cards but keep them open. Use them only in amounts you know you can pay off each month. Those are the two biggest steps. Then read the Debt.com report, How to Improve Your Credit Score Step-by-Step. That will get you where you want to go.

One note about your girlfriend: if her credit score is suffering under collections, please tell her she’s not doomed. In fact, a fellow Debt.com expert has helped a reader with five collections. She should read How Do You Beef Up A Credit Score When You’re Still Paying Down Debt?

What Happens When You Are Sued by a Creditor – and Can’t Afford It?

Question: What options do I have when I’m being taken to court by a credit collector when both the original creditor and credit collector would not accept the payments I could make? My original creditor sent me to collections while I was paying what I could as a single parent with lots of bills. Then I tried to make a deal with the collections firm, but they refused to accept what I could pay until I got my taxes. Now I’ve been served for court and I have no money for a lawyer. What can I do?’’

– Emily in Missouri

Steve Rhode, the Get Out of Debt Guy, answers…

A common misconception is that sending a little bit of money will keep you out of trouble with your creditor or collector – and keep you out of court. It doesn’t and it won’t.

You get no credit (so to speak) for good-faith efforts. The only payment you can make that will keep the creditor happy is at least the minimum payment you agreed to in your original lending agreement.

Outside of that amount, the next payment that can keep you out of trouble is a lesser payment – but one that the lender agrees to accept. Acceptance requires an offer from you and an agreement from the lender to accept the reduced payment. You don’t get to just send what you can afford.

Is your credit card debt getting out of control? Are you afraid of getting sued? Take a deep breath – we can help!

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What not to do

You do have a very good option, but before we get into that, let’s talk about your very worst option. That would be ignoring a court summons. There’s no scenario where that works out for you. It will lead to more costs and more stress.

By not showing up, you will lose by default. The creditor will get a judgment and go for a wage garnishment if that is available in your state. So first, check out the Debt.com report How to Answer a Civil Summons for Credit Card Debt. That will give you step-by-step instructions for dealing with this serious matter.

The good option

So what’s that one good option? It won’t sound like one at first: bankruptcy. That’s the surest way to legally slam the door on your debt. You will be protected from your creditors, and your debt will be eliminated. Forever.

Bankruptcy sounds bad because it’s serious – and because in the past, less-than-scrupulous people have abused it. But it’s also a legitimate and powerful tool for those in need. Each year, this country sees around 1 million bankruptcy filings.

So where do you start? Bankruptcy isn’t something you do yourself, like a weekend home repair project. It’s akin to building an addition to your home. First, check out Weighing the Pros and Cons of Bankruptcy. Then call a professional, which is required under the law. You can reach that person at Debt.com.

How to Reduce Credit Card Debt in 5 Steps

Let’s be honest – most people would prefer to solve challenges with debt on their own. You don’t have to share your finances with anyone, worry about judgement or put your fate in someone else’s hands. That’s why DIY strategies to reduce credit card debt like the ones we describe below are so useful. With some basic instruction, you can handle the issues on your own and move forward confidence.

Tired of struggling to pay off credit card debt on your own? Talk to a certified consumer credit counselor to find relief now.

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Still, it’s important to note that these debt reduction strategies won’t solve every debt problem in just any situation. Once you read this page and understand what you need to do, run some calculations. See how long it will take to repay what you owe and how much it will cost. If those numbers don’t make you happy, consider alternative options for debt relief.

The best way to reduce credit card debt

Step 1: First call your creditors to negotiate lower interest rates

This is the all-important first step that most people skip. People often never call their creditors to even ask for lower rates. As a result, it makes it harder to eliminate the debt and leads to higher costs.

Always keep in mind that lower interest rates make it easier to pay off debt. A lower rate means less of each monthly payment you make gets eaten up by accrued interest charges. Thus, you can pay off the principal (original debt owed) much faster.

To do this step effectively:

  1. Check the current interest rate on each credit card you use
  2. Jot down relevant facts about your credit:
    1. Length of time you’ve been a customer for each account
    2. How long you’ve gone without missing a payment
    3. How much your credit score has improved since you opened the account
  3. Check current credit card interest rates to know national average rates for each type of credit card you hold.

Now call the customer service department for each credit card and request a rate reduction. You may be passed up the chain to a supervisor that can authorize a new rate. Find tips to help you negotiate lower interest rates effectively.

Step 2: Prioritize your debts

Now that your rates are as low as possible, organize all the debts you need to pay off, moving from highest APR to lowest. You want to pay off your highest APR debts first because they cost more money. So, if you pay them off first you save money on total interest charges.

Step 3: Streamline your budget to maximize cash flow

Next, you need to get as much cash flow as possible for your debt reduction plan. See how much free cash flow you have in your budget – that’s all the cash you have left after you pay bills and necessary expenses. Then see if you have any unnecessary expenses you can cut temporarily while you reduce your debt. Remember, you will put these expenses back once you’re done eliminating debt. Think of it like a diet you stick to while you lose all that extra financial weight.

The more cash flow you have available to reduce debt, the faster this goes. Faster also means fewer interest charges applied to your debt, so it saves you money, too. It’s worth losing a few discretionary expenses for a short time to these high interest rate debts paid off fast.

Step 4: Pay as much as possible one debt, then minimums on the others

Now you can start knocking out your debts. At this point, you might think you should put a little extra money to all your debts at once. However, this isn’t cost efficient. You wind up with a bunch of $25.00 minimum charges to pay off all at once.

It’s more effective to focus on one debt at a time. You make the minimum required payment on all your credit card debts except the card with the highest APR. You use all the extra cash flow you generated to make the largest payment possible on that one debt. Then you continue to do that each month your balance on that card hits $0.

Step 5: Knock your debts out, one by one

Once you eliminate the first debt, move on to the debt with the next highest APR. Pay it off in chunks, then continue down the line until you zero out ever balance you owe. With each debt that you eliminate, you free up more cash to use towards paying off the next debt.

You can also start putting unnecessary expenses that you cut from your budget back in. This will help you avoid burning out on budgeting, which can lead to more overspending. Experts also recommend that once you pay off your credit cards, some of the funds you used on those bills should divert to savings. So, if you save $500 per month on credit card bills, set up a $250 recurring monthly transfer to savings. That way, you can generate a robust emergency fund, which prevents you from relying too heavily on credit cards.

The next best way to reduce credit card debt

The method described above is considered the best because it’s the most cost effective overall. However, that doesn’t mean it’s the best method in every financial situation. If you have large amounts of debt to eliminate with limited cash flow, the steps described above may not work. This is especially true if your biggest balances are on your highest APR credit cards. It’s easy to get exhausted by a lack of progress, and you may stop altogether.

For example, let’s say your biggest balance is $7,000 on a reward credit card at 22% APR. You only have $500 in extra cash you can put towards that debt. Even with fixed $500 payments, it would take 17 months to pay this debt off in-full. It’s almost a year and a half before you clear off that first balance – so, it’s not exactly easy to stay motivated.

However, let’s say you have two credit cards that each have a $1,000 balance. If you put $500 to those, you could finish paying each off in three months (with interest charges).  This would clear out two bills, giving you extra motivation and extra cash. Now, instead of $500, you’d have $550 because you don’t have to pay two $25 minimum payment charges.

So, in this case, it’s better to start with your lowest credit card balances, rather than your highest APR debts. You knock out the “low hanging fruit,” which frees up more cash to tackle your largest debts. The steps are the same as the five steps listed above; however, at Step 2 you arrange your debts starting with the lowest balance and ending with the highest.

Is debt reduction even the best choice?

Whenever you eliminate debt, you have two main concerns that relate closely:

  1. Is this the fastest way to repay what I owe?
  2. Is this the most cost-effective way to reduce my debt?

If there’s a faster, cheaper way to pay off what you owe, then you should do it. In many cases, this method of rolling up your sleeves and tightening your belt may not be the most efficient. It might be easier and cheaper to do it another way.

So, before you waste months (or years) of your life paying off your debt the hard way, make sure there’s not an easier way first. Look into credit card consolidation or call a credit counseling agency. Even though these agencies administer one type of solution – debt management programs – as nonprofit organizations they’re required to review all your options. They’re supposed to tell you what’s the best way to pay off what you owe.

Compare all the available solutions. See what will take the least time, give you the least hassle and save as much money as possible. Whatever solution that ends up being is the best solution to use in your unique financial circumstances.

Should I Refinance My Home to Pay Off Debt?

Question:  I’m carrying about $12,000 on nine credit and store cards, and the interest rates are killing me. I already rolled over the balances a couple times to low-interest and zero-interest cards, but I blew through the introductory offers. But I own my condo, and if I refinance it, I can probably cover what I owe. Should I refinance my home to pay off debt?

— Debby in New Jersey

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Tendayi Kapfidze answers…

There are several things to consider. Let’s start with the easiest and proceed from there.

On the surface, “should I refinance my home to pay off debt” is a simple question to answer. Interest rates on a home refinance are much lower than those on credit cards — around five or six percent versus 16 or 17 percent average for credit cards. So taking a cash-out refinance to pay off the credit cards would certainly lower your interest costs. Another alternative would be to get a personal loan, which has rates from seven percent and up. That’s higher than the mortgage, but it could still be lower than the credit card rate, depending on your credit profile.

A particular concern, Debbie, is that you said you “blew through the introductory offers.” So you have already attempted to lower your interest cost, which was smart. However, for this strategy to be most effective, it’s important to not add new debt, but instead, work toward paying off the debt. With nine cards in total, it may be that you have been rolling over balances to new cards and then building up more debt on both the new and old cards. Hence, you are not making progress on lowering debt.

Nine accounts is a lot to juggle, and you could benefit from a tool like myLendingTree, which uses algorithms to suggest debt consolidation strategies. This could help you find the best options for your particular personal financial situation. There is also a wealth of educational material that will help you improve your credit score and debt management.

Just to confirm my information, I asked my friend Matt Schulz about your situation. Matt is chief industry analyst at CompareCards.

“Plain and simple, you need to pay that card debt down,” he says. That’s because credit card APRs are as high as they’ve ever been, and they’re just going to go higher. “Zero-interest balance transfer cards are a great way to help knock that interest down, and even if you blow through the introductory periods and don’t pay the balance off in full, you’ve likely still saved yourself a fair amount of interest.”

Matt is also wary about refinancing your home, but he can see a scenario where it works.

“When you have $12,000 in debt, sometimes you need to make a big change,” he says. “If you do all the math and find that refinancing your home will free up a ton of money that you can use to pay down your credit card debt, then it’s certainly worth considering. A personal loan might be useful as well. Just make sure that you do your homework and know exactly what you’re getting into with either of these options, and that you understand all the fees and costs that come along with them. The last thing you want to do is make things worse on yourself because you made a rushed and uninformed choice.”

For further information read Debt.com’s education section on “Should I Refinance my My Mortgage?

Tendayi Kapfidze is chief economist for LendingTree.

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Can a Judge Forgive Your Debt? And Can a Judge Send You To Jail?

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Question: A friend of mine is disabled. Her only income is her Social Security disability benefits. She got into a lot of credit card debt, and one of the credit cards got a judgement against her in court.

A friend told her that because of her low income, the court might just maybe forgive her debt. Is this true?

And what would happen if other credit cards brought her to court? Can she go to jail because she can’t afford to pay the debt back? God, I hope not. Thank you for your help. We appreciate your kindness and your consideration with this question. Thank you so very very much.

— Dori in New Hampshire

Howard Dvorkin answers…

Getting out of debt isn’t as hard as you think. However, understanding how to get out of debt may be the hardest part. Debt management is a program that can cut your total credit card payments by 30 or even 50 percent by drastically reducing the interest rates. And when you’re done, you emerge with no debt and a great credit score.

With debt settlement, you pay pennies on the dollar of what you actually owe. But your credit score can take a major hit, because you’re actually paying less than what you owe. Debt forgiveness means you might pay nothing on your debt, but good look getting a loan in the future.  How do you decide which is best for you? Let Debt.com help you figure it out. Call now for a free debt analysis.

Let’s start at the end, because that last question is the easiest to answer: No, you can’t go to jail for unpaid debts. As long as you’re not defrauding your creditors or doing something illegal, trust Debt.com when it says: “No matter what those debt collectors threatened you with, the police won’t be beating down your door.”

If you click that link, you’ll learn that the United States hasn’t imprisoned debtors since the 19th century. It’s no mystery, however, where that fear comes from: Unscrupulous debt collectors either imply it or come right out and threaten it. In 2013, the last year Debt.com could find statistics, the federal government recorded more than 16,000 complaints that “collectors falsely threatened to arrest the consumer or seize their property for refusal of payment.”

With that out of the way, let’s talk about your friend’s debts.

Yes, it’s possible your friend could have her debt wiped clean. It’s called debt forgiveness, and it’s a powerful weapon. However, like all powerful weapons, it can injure more than just the target you aim it at. That’s why Debt.com has a report called, A Realist’s Guide to Credit Card Debt Forgiveness.

I urge you and your friend to read it, because debt forgiveness has gotten a bad name lately. Why? Because bad people are advertising that they can clear all your debts with forgiveness — and don’t worry, there’s absolutely no downside! It’s amazing and only we know how to do it!

Of course, you’ll end up paying these middlemen a hefty fee for a shoddy service, and you might even end up worse than before you contacted them. Think of it this way: Would you pay hundreds of dollars to someone promising a guaranteed weight-loss plan that lets you eat as many cupcakes and potato chips as you want, with absolutely no downside?

If you want a serious diet plan, you should consult your doctor first. If you want a serious debt plan, you also need to consult a professional. I recommend calling a certified credit counselor at a nonprofit credit counseling agency, where your friend can receive a free debt analysis. From there, all the options can be explored, from a debt management plan to bankruptcy.

If you don’t know which nonprofit agency to contact, Debt.com can introduce you to a reputable one. Bottom line, Dori: Your friend doesn’t have to go through it alone.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ready to seek real credit card debt relief? Debt.com can set you up with certified credit counselors who know how to help.

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Does Closing a Credit Card Account Hurt Your Credit Score?

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Question: I have transferred all my credit card debt to a single no-interest card for 18 months. I have five other credit cards, and now all the other credit card companies are increasing the limits on the cards I just paid off. Which is better for my credit score: Cancel them? Hold onto them? Or charge a little and pay them off each month? I really don’t want to use them.

— Kim in Pennsylvania

Howard Dvorkin answers…

Here’s the short, cryptic answer: The best thing for your credit score might not be the best thing for you.

Money in a minute: What if your credit score was a pie?

If you picture your credit score in a pie, it’s divided into five slices. But each slide is not the same size.  The largest – a third of the entire size of the pie – is called payment history. That means, do you pay your bills on time? The next biggest slice is just another a third, it’s called credit utilization. That means how much of your available credit have you spent. As you can see, that’s more than two-thirds of the pie.  Three other slices are really small.

Length of credit history is only 15 percent. And at 10 percent each are credit mix and new credit. What’s this prove? Focus most on the two biggest slices and your credit score will be easy as pie.

Now the long answer…

How a credit score works

You credit score is based on five factors. One of those is called “length of credit history,” and it comprises 15 percent of your score.

If those five still-open credit cards have been in your possession for years, then they’re actually boosting your credit score. Here’s the problem, though: You need to keep using them for that 15 percent to keep kicking in.

That means you need to make small charges every once in a while — and then pay them off in full. How often? Once a month to be safe, once a quarter on the outside.

Of course, if this poses too much temptation to once again run up your balances, the safe bet is to close those cards. After all, the biggest chunk of your credit score is called “payment history,” and at 35 percent, if you’re late on even a few payments, it’ll swamp that 15 percent you’re benefiting from.

Need help with your credit card debt? Debt.com can put you in touch with the credit card debt solutions you need.

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The second-biggest chunk of your credit score — at 30 percent — is called credit utilization. That’s the fancy way of saying, “How much you owe compared to how much you can borrow.” In other words, if you have $10,000 of available credit on five credit cards, and you’re almost maxed on them, your credit score will suffer mightily.

So as you can see, 65 percent of your credit score is determined by paying your bills on time, and keeping your balances low. That’s why it’s so hard to tell you if closing five mostly inactive credit cards is good or bad for you.

There’s one other factor of your credit score I even hesitate to mention, because it’s the most vague and one of the smallest slivers of the pie. It’s called credit mix, and it represents 10 percent of your score. In plain English, this means you have a variety of different credit lines.

Why is this important to lenders? It proves to them that you can pay back all different kinds of debt. In the case of these five credit cards, closing them would reduce the diversity of the debt you’re holding. So that’s another ding on the credit score.

If you’ve soldiered on through this long explanation, then you might see the wisdom in this advice…

  • Completely pay off the no-interest card within 18 months (or face sky-high interest rates).
  • Keep that card and 1-2 of the oldest cards you have.
  • Make small charges to each, and pay them off in full each month.
  • Close the other cards and don’t look back.

Within a few months, you should see your credit score creep up. Over many more months, if you keep paying off your cards each month, you’ll see it jump. Why? Because you’ll have a history of low balances paid on time, you’ll have a few very old cards, and you’ll be considered an excellent customer by lenders. You can’t beat that.

Want to know more? Check out Debt.com’s report, How to Improve Your Credit Score Step-by-Step.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Can I Retire With $60,000 On My Credit Cards? Or Am I Doomed?

Question: We are about $60,000 in credit card debt. I am 69 and need to retire. I will have retirement from my job and $35,000 in my 401(k), plus Supplemental Security Income. My husband is 57 and will keep working. How can I retire?

— Kathryn in Hawaii

Steve Rhode answers…

Retiring isn’t the problem here. This is: Making ends meet for up to the next 20 years.

Having some government benefit and $35,000 in a 401(k) isn’t going to make retirement comfortable for you — or even manageable. It will be tragically impossible to survive on these finances alone, unless your husband has some magic retirement account that will help to make ends meet when he is able to finally retire.

When you say you need to retire and you are on Supplemental Security Income, that indicates to me you have some evolving medical issue. SSI is what’s known as a “means-tested welfare program.” That’s the official way of saying the government will provide cash and Medicaid to low-income senior citizens and the disabled.

I’m assuming this means that continuing to work may just not be possible for you, given your potential medical limitations. Maybe that’s why you have to retire.

Given your possible medical situation, your limited upcoming income, and your debt, the most logical solution here would be to shed the debt quickly with a consumer Chapter 7 bankruptcy. This type of bankruptcy is the fastest way to eliminate debt legally, and in about 90 days your credit card debt will be discharged. That will lower your expenses that you can’t afford in retirement.

Your credit card debt is probably from expenses you paid for in trying to get by in the past. It’s all too common for those Americans struggling to pay their bills to “float” the gap between income and expenses on their credit cards. Sadly, that catches up to you rather quickly…

[If you don’t know if bankruptcy is right for you, read Should I File for Bankruptcy.]

If filing for bankruptcy is the right option for you, Debt.com can help you get the process started.

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…Retiring is the time to look forward and set yourself up for financial success. The ship has sailed to attempt to repair the past. Given what you’ve shared, you simply can’t afford to either pay the debt, now or in the future, and make ends meet on your new reduced income.

I would visit Benefits.gov and review if you are eligible for any additional supplemental income, medical, or food assistance for your household. You should absolutely meet with a local bankruptcy attorney who is licensed in your state and discuss your situation. And you should inform your husband he is going to have to be the primary breadwinner for the foreseeable future.

This won’t be a pleasant experience while you’re enduring it, but once you’re through it, life should improve. I’d also recommend consulting Debt.com’s Personal Finance section for advice on how to stay out of debt.

My fingers are crossed that your husband has a solid retirement account or pension that is going to help you survive when you are both unable to work.

Steve Rhode is known as the Get Out of Debt Guy and has appeared on FOX, CNN, ABC, NBC, and MSNBC giving money advice.

I Work Two Jobs, Yet I’m Drowning in Credit Card Debt. Why?

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Question: I owe about $80,000 in credit card debt across something like 22 accounts. I make slightly above the minimum payment on each, but I’m probably going to be missing payments.

Between a full-time and part-time job, I make about $35K-$40K a year. I have a wife who makes a good salary, but she owes $1,000 a month in student loans. She’s in a debt management program, but I don’t know if that’s the best solution for me.

Our combined income a month (after taxes) is probably about $6,500. But my minimum credit card payments are probably above $2,000 a month, When you add the student loans, maintenance ($500), and all other expenses, we’re lucky to even make a dollar

I’ve been in contact with debt management and debt settlement companies, who have given me multiple offers. There are positives and negatives for both. I’ve also contacted a bankruptcy attorney, but my assets outweigh our debt due to my wife and I owning an apartment.

We currently have a negative balance in our account and after we get paid next week, we might still have a negative balance. I’m still not sure what is the best solution for me. Help!

— Michael in New York

Howard Dvorkin answers…

If you tell many people that your household income is $78,000 a year, they won’t imagine you’re mired in debt — especially when the median household income in this country is just over $59,000.

Sadly, what you earn has very little to do with how much debt you have. I’ve counseled millionaires who owed more than they could pay. Some have declared bankruptcy.

In your case, Michael, two debts are hurting you most. They happen to be the two most pernicious: credit card and student loans. Lucky for you, most of the country is suffering right along with you. That means it’s a big enough problem that the government and private sector have come up with big solutions…

Michael writes to me:

I have three incomes, no kids, but I have a lot of debt. I’ve learned a lot in my quarter of a century as a CPA and financial counselor. Maybe the biggest lesson is this, going into debt has almost nothing to do with how much money you make.

I’ve met millionaires who are actually paupers because they’re living larger but borrowing bigger. In Michael’s case, he’s not a millionaire but he makes well above the median income for U.S. households.

Yet, two things are dragging his marriage down: credit cards for him and student loans for his wife. They make $6,500 a month. Yet, they might have a negative balance this upcoming month.

Since he and his wife both have good incomes, no children, and no other real major expenses the first thing he should do is speak to a professional who can help him with a plan to pay down his debt. Why? Because he has options right now.

Thankfully there are programs specifically designed for credit cards and student loans. A debt management program can reduce monthly credit card payments by 30 or even 50 percent. Some of his debt may be eligible and better suited for a debt settlement program.

And the federal government has a slew of programs to reduce monthly student loan payments. How do you find help? It’s easy as visiting Debt.com. And don’t forget to sign up for our newsletters for more great advice.

What are your best debt relief options?

1. Credit counseling

This first step is the easiest. It’s also free. You simply call a nonprofit credit counseling agency and speak with a certified credit counselor. You’ll get a free debt analysis that’s so comprehensive, you’ll probably be surprised to learn exactly where all your money goes.

This is important, Michael, because you’re not even sure how many credit cards you have (“something like”) and how much debt you’re carrying (“about”). Your predicament requires specifics to solve.

Read more: What Is Credit Counseling And Why Do I Need It?

2. Debt management program

The best way to get rid of credit card debt is known as a DMP. It can reduce your monthly payments by 30 to 50 percent and freeze all your late fees.

Sound too good to be true? It’s not. Your credit card issuers will forgo much of their profits to get paid back the principle you owe them.

There are restrictions, however. For instance, you must cut up your credit cards — because you can’t ring up new charges if you owe a bunch of old ones. It can also take months or years to complete a DMP. Still, once you come out the other side, you’re financially free. Almost every DMP client I’ve known has said it’s worth it.

Read more: Debt Management Program Pros and Cons

 3. Student loans

The federal government is worried about student loans. Why? Because the total student loan debt in this country is approaching $1.5 trillion. That’s more than all the credit card debt out there — by almost a third.

There’s no DMP for student loans. Instead, there is a slew of federal programs that can cut your monthly payments, and in some cases, forgive the debt. What’s the catch? It’s the government, and the programs come with complicated names like “income-based repayment plan” and “income-contingent repayment plan.”

Knowing which plan is right for you requires some studying, but Debt.com can introduce you to some experts who can help.

Read more: Federal Student Loan Repayment Plans

4. Debt settlement

Finally, you might have the option to pay less than you owe. That’s called debt settlement, but I only recommend it after you’ve exhausted the other possibilities above.

Why? Because debt settlement severely damages your credit score, it’s a complicated process, and there are unscrupulous people out there who will try to take advantage of you.

Debt settlement is a legitimate and powerful option, but it’s also a serious one. So you should consult an expert first. Debt.com can help you.

Read more: Debt Settlement: What is It and How It Works

Bottom line, Michael: You’re not alone with this problem, and you’re not alone with the solution.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.