Managing Debt With a New Credit Card

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Most financial advisers preach the evils of racking up too much debt, and not many would urge you to get another credit card if you already have one or two that provide all the credit you need.

But no rule is absolute. It could make sense to get a new card, and to use it for new purchases or a balance transfer, if you’re likely to get snared by one of the card industry’s traps.

The problem is the way your payments are credited on a card that charges more than one interest rate. On a single card, you might be paying 0% on balances transferred from another card, 13% on new charges and 24% on cash advances.

The smartest strategy, of course, is to avoid all interest charges by paying the entire balance off during the grace period. But that’s not always possible, especially after big spending periods like vacations or the holidays.

So the next-smartest approach would be to pay off the 24% balance first, then the 13% balance and finally the 0% balance transfer.

But card issuers have long exploited this situation by doing the opposite, applying customers' payments first to the debts with the lowest interest rates. That means your balance transfer gets paid off first, so you may have to pay interest on the more expensive balances for months, perhaps years.

The new credit card reform law that took effect in February requires that any payments above the minimum required be applied to the debt with the highest rate. But the minimum required payment goes to the low-rate debt, just as it did before the law took effect. Even if you pay more than the minimum, that minimum amount is going to the low-rate debt, the rest to debt with the next highest rate and so on.

If you can’t pay the whole balance at once, the next best strategy is to avoid using the card so you don’t add to the high-rate debt. Instead of using the credit card, you could use a debit card, which pays for purchases by drawing from your checking account.

If you cannot do that, use another credit card that will charge a lower rate than the highest one you’d pay on the card that’s giving you trouble. The credit card shopping tool can be set for a couple of approaches.

One is to get a new card that will charge a low or 0% interest rate on balance transfers. These cards typically provide a set of checks the customer can use to pay down balances on other cards, shifting the debt to the new card.

If you do this, you’ll probably want to avoid using the new card for new purchases subject to interest charges, or else you’d repeat the same old problem of paying off the low-rate balance first.

That means you many need yet another card for new purchases. Ideally, you keep that for emergencies and try to avoid using it for day-to-day expenses, so you can afford to pay off other card debts. Use the search tool to find a card with a low rate.

If it all sounds like a headache, it can be. All the more reason to keep your credit card use to a minimum. Once you’re in the clear, cut back to just one or two cards, as having lots of cards can hurt your credit rating.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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