I clicked on “send payment” and felt free.
It was January 2021. I was sitting in my apartment in Brooklyn, New York, looking at the credit card statements on my laptop. After 10 months of budgeting, I could afford to finish paying off my $ 15,000 debt – my highest balance since 2010, when I opened my first credit card.
When I was 18, my mother warned me, “It’s only for emergencies. I defined “emergencies” loosely, like charging my brother’s limo for the bachelor party or buying a suit for work.
I’m not alone. Americans’ debt, mostly on credit cards, reached $ 998.4 billion in July, according to the Federal Reserve. Perhaps the pandemic was a wake-up call: Last year, Americans paid off a record $ 83 billion in credit card debt, according to a study by personal finance site WalletHub.
Fortunately, I am among them. But instead of sipping on my party mezcal, I regretted a huge mistake: by paying my debt, I completely stopped using my cards, causing one of my two accounts to be closed “due to inactivity”.
It sounds trite, but it has had consequences.
How I paid off my $ 15,000 credit card debt
At first, I was looking for simple solutions.
My bank did not offer any refinancing service, so i applied for a debt consolidation card online to collect my debt in one low interest monthly payment. But my balance was too high, and the word “refused” flashed on my screen.
Then the pandemic struck. Unprepared for further financial downturns, I wrote a strict budget. I couldn’t make more money, but I could cut back.
First, I put $ 4,000 of my $ 5,000 emergency fund on my debt – a strategy endorsed by personal finance expert Dave Ramsey, as CNBC Make It noted in 2018.
My federal student loans were forborne, which meant my monthly payments were suspended, along with all accrued interest. So I rebudgeted, sending my prepandemic student loan payments to my credit card debt instead..
Add my first two government stimulus checks, totaling $ 1,800, and my debt balance fell to $ 5,950 in three easy steps.
I continued to pay the minimum for my cards, $ 419 per month. After 10 months, my debt had fallen to $ 1,760. Cash paid the difference: extra weekends to keep dogs and sell old goods.
In January, my debt was paid. Two weeks later, the bank that represented one of my cards sent me a letter: “Unfortunately, we have made the decision to close your credit card account.
My unexpected mistake – and its consequences
I thought I had done everything right.
I didn’t want to increase my debt while paying it off, so I didn’t use my card until I hit a balance of $ 0. But my bank marked the account “inactive” and terminated my line of credit without notice.
My credit rating went from “good” to “bad” overnight. How did I not know?
“If you have underutilized credit, which means you don’t invest anything in it forever, they can sometimes close it,” said Tim Maurer, a member of the CNBC Council of Financial Advisors. “It can actually hurt your credit report. “
This is because of a measure called the debt-to-credit ratio. It is the amount of credit used versus what is available. If what’s available goes down, your ratio goes up, which hurts your score.
My available credit was halved when my card was closed.
“Inactivity is the most common reason for lowering credit limits,” says Ted Rossman, senior credit card analyst at the personal finance website Bankrate. “We’ve seen it in past recessions, when lenders get nervous, customers don’t want to pay them back. “
In 2008, the Federal Reserve found that 20% of banks reduced the credit limits of major borrowers. This happened again during the pandemic, according to data from surveys of senior Federal Reserve loan officers.
I spoke with three customer service reps to reopen my card. Everyone told me that I should reapply for a new card. With a “bad” credit rating, I was less likely to get approved.
Not worth trying, as I still had my other credit card. But since experts recommend using 30% or less of your available credit, and now I have much less available credit, I have a strict spending limit, which I constantly monitor.
How to properly use your credit, even when paying off your debt
There is no foolproof solution to avoiding my situation other than avoiding debt in the first place. – but you can keep a few tips in mind.
Rossman’s recommended method of keeping credit checkers at bay is surprisingly simple. “The occasional use of a card, even for small purchases that you pay off immediately, can help you avoid unwanted drops,” he says.
But depending on your bank, you may need to use this card more than “occasionally”. Last year, Rossman says, he received a letter stating that one of his credit limits had been cut in half because he rarely used more than 10% of his limit. “I used it, but not a lot,” he says.
Quickly, Rossman called his bank’s customer service team and asked for his old limit. Fortunately, the bank said yes, but it won’t happen every time, Rossman says.
Do not use more than 30%. Always use more than 10%. Finding that perfect place is difficult. Doing it regularly seems impossible, but I stick to it.
Today I still have an active credit card. I set limits on the monthly fees and pay my statement on time and in full. My credit rating is up 20 points since the start of 2021.
I’m using my repayment budget – the $ 419 per month and my student loan payments, which are still overdue – to replenish my emergency fund.
There will certainly be another bump in the road ahead. When that happens, I’ll take a deep breath and start my research again.
Until then, I’ll be feasting on mezcal.
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