Everyday Cheapskate

Have you heard from your credit card company lately? Millions of cardholders have. Believe me; we're not talking about love letters. Credit card issuers are raising interest rates across the board. On everyone. It's likely you were given 30 days to decide whether to accept the increased rate. If you opt out, your account will be closed to future purchases while you have the opportunity to pay off the balance at your current rate.

My inbox has been flooded with messages from readers who don't know how to respond. If they opt out, how will it affect their credit scores? A closed account can show up as a negative entry in one's credit file. Would it be better to swallow hard on that 27.99 percent interest rate in favor of an unblemished score?

Here's my answer to these and all other related dilemmas: It depends on whether you are carrying a big balance on the account in question.

IF YOU HAVE A BALANCE. This is the pivotal issue. If you have a balance on a credit card account that you cannot pay off within the next 30 days, you would be foolish to accept a big interest rate increase. You need to opt out, accept the account closure and breathe a tiny sigh of relief. Finally, someone is stopping you from going deeper into debt.

Do you know what 27.99 percent or higher looks like in a monthly payment? It's huge. Here is an example: If you have a $2,500 balance at 9.99 percent interest, about $20 of your monthly payment goes toward interest. Increasing that to 27.99 percent means $58 of your payment goes toward interest.

If you are making the minimum payment only, hardly any of your payment will go toward paying down the balance.

YOUR CREDIT SCORE. Opting out will trigger a negative report in your credit file. Your current balance will become 100 percent of your available credit. This is bad for your score. So is losing an account you've had for a long time.

But keep things in perspective! To worry about your score when you are about to be eaten alive by credit card debt would be like seeing that your house is on fire and being concerned about whether you turned off the iron. In the grand scheme of things, credit card debt is far more dangerous to your future than, say, a 100-point drop in your credit score. Neither is ideal, but they are in no way equal.

IF YOU DO NOT CARRY A BALANCE. This changes everything. An interest rate increase will not affect you. In this case, you would benefit by accepting the account at the higher rate. Your credit score will continue to benefit because you will show 100 percent available credit on this account, along with a great history.

Now, more than ever, is the time for you to buckle down and get out of debt. Whatever it takes to do that is what you need to do!

Mary Hunt is the founder of www.DebtProofLiving.com and author of 18 books, including her latest, "Can I Pay My Credit Card Bill With a Credit Card?" You can e-mail her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723. To find out more about Mary Hunt and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.

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