More Money More Problems

I put this question on Twitter, but it’s sort of too complicated for Twitter so I thought I’d ask it here.

Ok, so Mr. E and I have this credit card.  It is essentially maxed out, I think at any given time it has about $600 ish dollars clearance on it.  So let’s say the balance is $40,000 dollars. It’s not, but I just picked a number that’s super high so you can get the idea of what we’re talking about without me telling you my actual credit card balance.

This card also has a terrible interest rate, and it’s from Wells Fargo, a financial institution that I Hate With the Fire of A Thousand Suns.   And bonus, I get NOTHING from this card, rewards wise. NOTHING.  So obviously, it sucks, and I would prefer not to have it.

But! Good news! I have the cash to pay off the entirety of this credit card sitting in my bank account.  What I want to do is pay the card off, close it the account, and never darken the door of Wells Fargo ever again.

At some point, I’d like to open a Southwest Airlines credit card, on which I do not carry a balance, but which I get free airline tickets from.  If I’m going to spend $800 a month on groceries, I’d like to get something for it  besides just groceries.  Plus I think I can check three bags free on Southwest Airlines, and I’m going to need all the luggage allowances I can get to transport all the cafe lights in the world to New Orleans in November.

However, at some point this year, Mr. E and I would like to buy a new car.  So, I want to choose whatever course of action will mean I have the highest possible credit score/income to debt ratio/blah blah blah financial hoozits so that when I buy this car, I get the best possible interest rate on the loan.   People tell me that closing a credit card can reduce your income to debt ration (because that credit is not available to you anymore) but when we bought our house, our Macy’s card worked against us even though we didn’t even have a balance on it.  I am confused.  (Maybe because it was a store credit card and therefore essentially useless? It has since been closed, btw.)

So my options are:

1. Pay off evil credit card, close evil credit card, get no new credit cards.

2. Pay off evil credit card, close evil credit card, get Southwest credit card.

3. Pay off evil credit card, leave evil credit card open but cut it up and never use it, get no new credit cards.

4. Pay off evil credit card, leave evil credit card open, also get Southwest airlines credit card.

I would really like to close the account and get a SW card, but I am ok with whatever option means I end up with the lowest interest rate on my car loan, and I have no idea which is the best choice for that.  Let me know what you guys think! Or if I am missing the actual correct thing to do, somehow.

(We don’t have a car payment right now and we’re planning to drive this car as long as we can, but if the engine falls out or it needs expensive repairs this year, we’re not doing them.)

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26 Responses

  1. You know I have no idea, but I also hate Wells Fargo with the fire of a thousand suns but there wasn’t nothing else in Nebraska at the time. Grr. Argh.

  2. In terms of a great credit score, options 3 and 4 are your best bet, with #4 being the best…I’ve cut up many a credit card in my day, and it works. While not THE only factor in a credit score, having credit available to you (like a $40k line of credit) is a very, very helpful thing.

  3. I choose Option 4 until after car purchase, then close WF account

  4. I’m going to ask David what he thinks. He is pretty in the know and has Definite Opinions on these things.

  5. I would say it depends on a few more factors. If you got a personal line of credit at a bank (that isn’t the blasted WF) would the interest paid on that be less than interest you could earn on the bank money if you put it into a cd or something? Also, have you had any late payments on the card? If so – that works against your credit in big ways for long periods of time. If you’re going to pay it off in full, I’d talk to WF (I know, I know) and speak to some kind of manager telling them your intentions and could they help you out with some of the interest. Worst thing they can do is say no.

  6. Go with ally’s comment you want the highest debt to credit ratio you can get. As crazy as it seems.

  7. I vote for #4.

  8. This site will help you estimate your credit score.
    http://money.msn.com/credit-rating/your-credit-score.aspx
    Try putting the info in different ways to see what gets you the best one.

  9. 1) Opening a new card will lower your credit score for about six months to a year, so if you plan to buy a car soon, that will impact the financing you get.

    2) this is a good discussion of when to cancel a credit card (it says don’t, if you are making a major purchase in the next year).

    http://www.getrichslowly.org/blog/2008/09/16/how-and-when-to-cancel-a-credit-card/

    I’d pay it off and leave it open. I have a main credit that we use for 99% of our monthly spending. We also have three cards that we use for recurring monthly bills like the gym or netflix (literally, I charge about $20 a month on them), just to keep them open and active in case we ever need them, and so the issuer doesn’t cancel them or charge a fee for lack of use. If my husband ever lost his job we could easily abscond to Mexico on those cards and pay the minimum for years.

    I don’t like to cancel “real” credit cards like Citibank, but I do close store credit cards, like my Ann Taylor card or a Sears card.

  10. I would look on Suze Orman’s website, but I suspect #4 is the best until you get the new card. If your credit score is good, closing the account probably won’t make to much of a difference though.

  11. Pay it off and leave it open, but also, as Lisa said, you need to charge something little on it every once in awhile, so that the card stays active.

  12. I have no opinions; I truly came to get rich off of everyone else’s knowledge.

    (But good luck! And DOWN WITH WF!)

  13. Kate is right. There was a piece about this on the TODAY show this morning.

  14. This whole stupid game is so infuriating, isn’t it?

  15. You have to leave it open as annoying as that seems especially if you have had the card for awhile. The longevity of paying on time on a credit card will help you.

  16. I so hate to be the douche here and ask, do you have a financial advisor? If you do, call them- they will tell you exactly what to do. #4 sounds like the right choice to me but, I, as you know, am not to be advising anyone of anything.

  17. I think your best bet is going to be to pay off the card and leave it open to show a larger available credit balance and a longer credit history. Then I would l look into getting the new car loan first and then opening the additional credit card. After you have done that, then you should be in a better place to close the WF card without hurting the interest rate you would get on the car loan. To get an idea of what will happen to your credit score, go to creditkarma.com. They have a feature on their website where you can enter different scenarios and it tells you how it will effect your credit score.

  18. In my own opinion, the Southwest card isn’t that awesome anymore (they’ve switched it up now and it seems like it takes FOREVER to get free flights). We went with the Chase Freedom card which is cash back and has no annual fee.

    also, it’s 2 bags with Southwest 🙂

  19. Both closing the WF card and opening a new one will bring your credit score down. Probably for 6-12 months. So, you can either pay off the card, then sit in limbo waiting for the car to die before doing anything else or go ahead and open the new one with the hope the car will last another 6-12 months. Regardless, I’d wait to close the old one until you get the loan (to have a higher amount of unused credit).

  20. Can you leave WF card open and transfer the balance to Southwest and diligently pay it off? At least until after the car purchase?

  21. Ok… #1 – I hate Wells Fargo as well. They are the devil. #2 – I’m with Ally. Keep it until you get the card, then tell WF where they can stick it. #3 – I’m also with Janssen. We have a BofA Alaska card and the benefits keep going down while the annual fee keeps going up. I hear the Southwest card is heading the same direction. My brother has Chase and he loves it.

  22. don’t close it, that shortens your credit history and it’s just not a good idea. keep it open and make them send you statements and they will hate you, you’ll cost them money and give them nothing, that’s how you torture a credit card company. Open a new discover card or something else with great rewards but really, don’t close the old one unless you have slews of other credit cards that date back as far. The credit situation is really tight right now and it’s really important to play their game better than they do.

  23. You should pay it off and keep it open to lessen the impact of your credit score. But one thing you may want to consider about the new car–we were going to buy a new car this year, but we looked into it a little and found that it really made more sense to buy a slightly used car with our savings. So we have a basically brand new car (15,000 miles) for much less than we would have paid for a new one, we let someone else pay for all the depreciation, and we have no car payment. You can really save a lot of money buying slightly used, and you end up with just as nice of a car. (If the maker of the car you are interested in has a certified pre-owned program, that’s even better–then you can have confidence in buying used).

  24. #4 for sure. It’s evil, and I don’t quite get it, but when we refinanced our house, they said our credit scores were helped by the fact that we had open lines of credit, many of which I’ve completely forgotten about. (cough Victoria Secret cough). Why bother formally closing it, if you know you’ll never use it again? Can’t hurt.

  25. May I also recommend the Capital One Venture card. You can use the miles for any airline or travel purchase, and we got no interest for ONE YEAR. That was so helpful in our recent travels.

    Good luck!

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