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If you're not happy with a financial product, deep-six it
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Q I am curious ... I received a notice regarding a change in terms to my Target Visa card. The 15.99 percent interest rate will be raised to 18.99 percent. I have an opt-out option that will close the account and allow continued payment on my current balance under current terms.
The account has been open eight years, I've never been late with a payment and usually pay more than the minimum due. Overall, my credit is good; my weak point is my debt-to-credit ratio.
I'm inclined to close the account, but I do wonder how doing that may affect my credit. I figure that by closing the account I am eliminating the available credit on the account yet retaining the debt, thus adversely affecting my debt-to-credit ratio. Am I better off to cut my losses, so to speak, and close the account and know that, as I pay down the balance until I get to zero, my debt-to-credit ratio will gradually improve?
CYNTHIA
A When you're no longer satisfied with a financial product or financial service you stop using it. Period. That's the real power of the consumer in our system.
But the problem is, in the perverse world of credit scoring, that common-sense move can penalize you. Like it or not, credit scores matter. So, closing an account will nick your overall score for a while. You're right: Your debt-to-credit ratio will go up, because the amount of money you owe will be higher compared with the amount of money you can now borrow after closing the account. (The credit-to-debt ratio is the total amount of debt you owe vs. the total of your credit limits.)
That said, I'd get rid of the account. The only real question is timing. I would hold off if you have a major purchase coming up in the next year or so, say, for a new car or a home.
Don't cancel the credit card until you've taken out the loan you need for that car or home. You'll get a better interest rate by waiting. Once the major purchase is behind you, cancel the card.
And no matter what you decide to do, pay off the debt on the card. (Sorry, I just had to say that.)
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org, or to kaching@startribune.com. Put "Your Money" in the subject line.
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