How jumping on first card offer can backfire

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To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of “Help! I Can’t Pay My Bills: Surviving a Financial Crisis” (St. Martin’s Press, 2006). She writes “To Her Credit,” a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

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Question
Dear To Her Credit,
I have just begun the road to good credit and in doing so I’m
terrified of doing anything that will damage it! My question pertains to
closing a new credit card.

A little background: My mother was a Dave Ramsey fanatic when I
was younger. I was with her when she cut up almost every credit card she had,
and from that I learned that credit cards are bad!

Fast forward many years later, and the realization of the
vicious cycle that you can’t get credit without credit hit hard. So, I saved
enough to get a secured card. I’m excited to report that my credit score has
grown with every payment for the past five months.

Recently my score reached 629, and I received an offer for my first
unsecured card. I was elated! Unfortunately, this excitement caused me to go
against by better judgment and get the card with a cash back rewards program, a
high annual fee of $75, and a low credit limit of $300. Even with no purchases,
my current available balance is only $225, which is almost at the recommended
30 percent of utilization rate.

I can’t figure out how to pay this off and gain my full $300
limit back. Should I cancel this card? I only activated it yesterday, but if I
can’t pay the annual fee off my account then I can barely even use the card
without risk of damaging my credit utilization ratio, and therefore can’t use
it enough to earn any rewards worth the annual fee.

I’m only worried that
canceling it will dramatically damage my precious growing credit score. I have
done some research on your website about canceling cards, and I do have a zero
balance on the card, except for the fee.  – Stephanie


Answer


Dear Stephanie,
An annual fee of $75 for a card with a $300 limit seems
awfully high. In hindsight, you can see how taking the first offer of an
unsecured credit card can be expensive without doing comparison shopping for
the best deal.

The card offer that shows up in the mail is seldom the best deal
you can get. You could have done better by looking at our lineup of credit
cards for consumers with
“fair” credit
(580-669) or if you had checked CreditCards.com’s Offers Matched For You.

For example, the Capital One Platinum card offers a
Mastercard with no annual fee to consumers with fair credit. In addition, it
advertises that you may qualify for a higher credit line after making your
first five monthly payments on time.

It may not be too late for you to cancel your new card and
get a refund of your annual fee. Call the number on your card and tell them
what you want. They may let you cancel the card to avoid the fee, or they may
even offer to waive the fee in order to keep your business. Don’t delay – they
may have a time limit during which you can get an annual fee refund.

I wouldn’t worry about hurting your credit dramatically by
closing a new, unused card. It wasn’t contributing much to your credit history
or score yet anyway, except for the small amount of available credit. If you
find a card without a fee or with a lower fee, you will soon be better off both
financially and credit wise.

What to do if you can’t get the annual fee waived

If the bank refuses to refund the fee, you don’t have much
choice but to pay the $75 – the sooner the better. The last thing you want is
to pay interest, let alone late fees, on a $75 bill you’ve already decided
wasn’t in your best interest.

One idea to get the cash to
pay the new card’s annual fee is to cancel the secured card and get your
deposit back.

Then, once you wipe out that $75 balance, use the card for
small charges every month and pay off the balance. Before the annual fee hits you next year, start doing your
research to find a no-annual-fee card that truly fits your lifestyle and
budget.

Once you get that card, you can cancel the card with the annual fee. Your
score may fluctuate a bit with the hard inquiries and the loss of a credit line, but with responsible credit card use, over time your scores
should settle down and continue to move forward.

I’m glad you decided to work on your credit score, despite
having been told when you were younger that credit cards are bad. I am very
familiar with the Dave Ramsey program, and I know it has helped many people immensely.

However, as you discovered, taking a hard line against ever having any credit
cards can actually turn out to make life
more difficult. As an adult, you are wise to take the best of any personal
financial guru’s advice, such as staying out of consumer debt, and still make
your own financial decisions as you see fit.


See related: No annual fee credit cards, How a secured card’s security deposit works




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