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Putting a dream vacation on a new card can be risky

Erica Sandberg

September 10, 2015

QHi, Erica,

I just got a Chase Sapphire credit card and used it right away to make a giant life purchase: For my girlfriend and me, I bought two tickets from Los Angeles to London, and I put the hotels plus incidentals like theater tickets on it, too. My credit limit was $5,000, but now my balance is up over $3,500. We haven’t even left, and I expect to use my card in the U.K. Is it too late to ask for a bigger credit limit? My plan is to pay everything in six months. — Calvin

ADear Calvin,

Aren’t you the generous gent!

The credit card company you’re working with, however, may not be so magnanimous. You’ve only just received this account, and the credit limit you were granted was based on your recent past history and present financial circumstances. After checking your credit rating and income status, the issuer determined that $5,000 was what you could afford to borrow and repay — and what the issuer was comfortable lending to you. Until you prove that you deserve a more liberal line of credit, the five grand will be the maximum amount you can charge for a while.

Of course, you can ask Chase for greater borrowing power, but even on the off chance it consents, I suggest you reconsider. It will be more important to repay the obligation you’ll owe upon return to the U.S.Ask Erica

Here’s why:

  • Youll keep the cost low. If you charge up the absolute limit (the card has an APR of 15.99 percent) and you delete the balance in six months, the finance fees will be somewhere around $235.76. Not bad at all. Of course, you can reduce those fees with larger installments. Just don’t pay late, as it can trigger an interest rate hike — and the fees will grow.
  • You can plan for payments that are within your capability. To achieve the goal of being debt-free in half a year, prepare for fixed payments of about $873. Now is the time to determine if that is truly an affordable regular outlay. If you can’t maintain such big payments, you’ll extend the repayment period and the total cost of the debt will escalate.
  • Your credit rating will increase. Your credit rating was probably quite good when the issuer first granted you the credit card, but it may have taken a hit with your substantial purchases. While payment history is the most important factor in a FICO, credit utilization is a close second. It’s best to carry a balance that is far lower than the limit, so until you dent that debt, your scores will sag. By following through with your initial strategy, the balance will steadily decline. At the end, your scores may be even better than they were before. That’s because you’ll be indicating that you can borrow and repay great sums of money quickly and according to the repayment terms.

When you’re back in the black, you will once again enjoy full access to the account’s $5,000. At that stage, consider how much of a credit line you need for everyday use.

Although credit cards are certainly excellent for short-term financing — such as covering the cost of a grand vacation in less than a year — they’re at their best when used as payment tools. That means charging only what you will repay in about 30 days. You’ll never pay a penny in interest, rack up reward points (Chase Sapphire has a great program!) and ensure a positive credit rating long into the future.

Got a question for Erica? Send her an email.

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