Switching credit cards?

Every day millions of credit card offers are sent out in the mail to prospective cardholders who are on the lookout for a more appealing credit account.

Unfortunately, after being tempted by short-term promotional features many cardholders act impatiently and switch to a card which will put them in even more debt in the long term. By considering the following information before switching credit cards, it is possible to minimize the amount of debt incurred and maximize financial freedom. 

Instead of simply considering the promotional interest rate, it is even more important to review the ongoing rates and conditions that will be applied once the promotional period is over. Thoroughly review each prospective cards terms and conditions, especially those related to interest-rate penalties and late fees. Preferably, look for a card issuer that charges one-time late fees rather than penalty interest rates, as a higher interest rate will ultimately create more debt than a single fee. Also, customers should find out whether or not balance transfer fees are applied both during and after the promotional period.

Ideally, when switching credit cards it is best to find a card that has a promotional period during which no interest or fees are charged on balance transfers. This will give the card holder the opportunity to consolidate currently outstanding balances from other credit accounts to the new credit card without incurring additional expenses. If the new credit card has a lengthy 0% APR promotional period, it may be possible to repay all of the debts without incurring any interest, thereby saving the cardholder hundreds or even thousands of dollars.

Before taking this route, it is imperative to inquire with each credit card issuer to find out if they will charge a fee for transferring their balance to another card. Customers should calculate the total expense of the balance transfer including fees and interest, and determine whether or not this expense will negate the interest saving benefits of the decision.

Many credit card holders make the mistake of closing down their credit accounts as soon as they switch to another card. While this may seem like a wise decision which can eliminate the temptation to use that card again in the future, it can actually be detrimental to the credit score.

Credit reporting agencies base the credit score largely on a factor known as the debt to credit ratio (also referred to as the utilization rate), which is basically the amount of debt the cardholder has in comparison to the amount of credit they have available to them at any given time. Closing existing credit accounts lowers the amount of total credit available, thereby affecting the utilization rate. Thus, it is best to estimate what the utilization rate will be after an account is closed in order to determine whether or closing the account would be a beneficial course of action.