December 30,2008
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Dormant Credit Card Concerns, Pt.1 –
– How many accounts are healthy?With all the ‘dormant' credit card accounts being closed by the lending institutions, many will naturally wonder how this will affect them. There are several factors that come into play here and it may be helpful to understand how things interplay in determining each individual credit card holder's situation. Factors like total available credit, debt ratio, credit history length and best interest rates all come into play here. Though things may be fine with your credit cards just the way they are right now, keep in mind that things are on the move. That great low-interest deal you love so much may go away. The large amount of credit that's been extended to you may evaporate before your eyes. All it takes is a letter (or, in a worst scenario, an ‘over charge' surprise package (called a ‘package' because many bad things are bundled with it).
Basically, three things are inter-related here: Risk; Functionality; and Future Planning. Having a few extra credit cards around can add functionality and provide for the future but, can increase risk also. Having only one credit card worsens all of these facets. Having too many provides functionality and future planning but can increase risk also. To determine the best balance, one must consider these things:
Risk: Having only one credit card is like putting all your eggs in one basket. It's simpler but, if the basket falls, all is lost. Having too many allows for more options but also carries some risk. For those who are maintaining 32 good-standing accounts (as I do), you have more options but, beware of the dreaded universal default.
What that means is that, if one little mishap occurs where you miss a payment on any one of these cards, not only that credit card account goes south but they all can because of that. All of your lenders have the option of jacking your interest rates up to 30%. 32 open accounts is a lot to keep track of. Each individual should decide what is safe from those dangers.