Wise Use of Paid off Credit Cards? You Decide.

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Paid off credit cards – shred ‘em, close ‘em, and forget ‘em – OR – shred ‘em but leave open and risk fees in hope of increased FICO score – OR – risk fees, leverage rewards, and laugh all the way to the bank!

On Wednesday I featured an article titled “More Reasons to Pay Off Credit Card Debt” where I mention a few of the ways our recent reduction in spending and use of credit has affected our relationships with our credit card banks.  In summary, the recent changes we’ve made in spending make them mad – and the ways in which they’re responding make me puke!

So… should I tie them to the bumper of my car and drag ‘em through the city streets?  Or risk navigating the shark infested waters by trying to increase my FICO score and/or exploit their rewards programs while avoiding the 47895 possible fees?

What is the most wise use of paid off credit cards?

To help me decide whether I should close the 3 credit card accounts and forgo the benefits of increased credit score and possible future rewards – or keeping them open, risk the fees, and hope my FICO score will rise… I will turn to the über-wise DFA debt slaying community.

In today’s post I will detail the three choices I am kicking around including the approach I am currently using, along with two opposing responses I received from two DFA commentators… and put them up for all of you to examine – vote on – and comment on.

Three possible approaches:

My current approach:

As of right now I have paid off all three credit cards, shredded all but one, but have not closed any.  I haven’t closed them because the word on the streets is… a paid off credit card will increase your FICO score – but a closed card will not.

“Steve in W MA” uses his cards with this system and reaps the benefits…

After getting used to using the Cash Envelope system for all my ongoing weekly and day to day spending (Food, Gas/Tolls, and Fun), I have discovered that it has trained me to stay on budget like a hawk. So now what I do is shop with the envelope in hand as well as my credit card.  I clear all purchases with my budget by first looking to see that enough greenbacks are in the cash envelope, then I use the credit card to run the purchase.  I take the greenbacks from the cash envelope and put them in a fourth envelope I carry marked “VISA repayment”.

The cash envelopes get adjusted, the Visa bill gets paid, I don’t go over budget or into debt, and I get the 1% (soon increasing to 5%).

I am astonished at how much the cash envelope system is doing for me – even though, by including use of a credit card,  I am acting  in a way staunch Dave Ramsey followers might consider perverse and twisted.

The fact that I clear all spending by checking my cash envelopes first means that I cannot fall prey to the usual temptations of the credit card including… losing track of your money, spending more when you use it, and going over budget (and risk falling into debt over time.)

I still spend at my predetermined budget limit, but I am getting the 1% back (soon to be 5%.) And for someone who watches their dollars like a hawk and spends less than $50 a week on food, that one percent, or $2-$4 a month,  is appreciated and will go to good use. Once I am getting 5%, it will be $10 a month.  $10-$20 is decent money to be had – if and only if you are sure you aren’t losing $200 out the other end by overspending. However, the cash envelope system as I describe here prevents that overspending.

I would only recommend doing this to people who:

  • are familiar with and  use a cash envelope system as well as a master budget system
  • have been successful at using the strict normal cash envelope system for several months and therefore have begun to associate normal spending behavior with  checking the envelopes and pulling out cash, rather with reaching for your credit or debit card
  • in general are no longer as tempted by the lure of spending.

My long term experiences have shown me that using a credit card without a similar system of proven success, or while still experiencing spending temptations, will most definitely cause you to overspend.

Whereas Mr. Not the Jet Set holds a completely different point of view…

Matt – love the post.

First – “Can’t you just see the execs of Capital One, Citibank, etc. sitting around in a board room coming up with new ways to screw us out of our money?”  Yeah, I nearly fall off the couch laughing at these new credit card commercials & how they wanna be your buddy again. “Yeah, yeah, we hate debt too, so we’re giving you 17 new BS features to help you, ya know, pay off your debt or something… oh and we’ve got this sweet rewards program too…” As if.

Second – I’ll join the chorus here and challenge both you and Peter to shred those cards. Burn’em. BBQ’em. Whatever! Ditch the credit cards and their never-ending schemes. Then come back in a month, 3 months, 6 months – tell me if you really miss it. It’s not like you can’t go out and get another card if it’s really that awful.

It’s a much simpler life.

What do you think?

Kill credit cards & bury ‘em in the back yard – Leave them open but shred ‘em – or use & abuse them and beat credit card banks at their own game?  That is the question!

Here is a poll.  Weigh in with your opinion… I’m really intrigued to find out what the majority of DFA readers think.

[poll id="4"]

Where is Mr. Credit Card when you need him?

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DFA is passionately dedicated to helping people break the bondage of debt and work toward financial freedom using biblical principles.



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1 Baker

I don’t like using any system the encourages or *rewards* spending. It’s simply not in line with my current values. I don’t want to have to juggle another account number, another communication from a company, another open account when I review my credit report, another due date, another balance.

Since I cut up AND canceled all of our open accounts, I’ve not had one ounce of regret. The only time I ever even think about it is when I write a blog post or comment on the topic. Purging this industry from my life just feels so liberating.

2 Matt Jabs

Sounds like breaking up with a bad girlfriend! ;-)

3 Barbara Weatherly

or boyfriend

4 Jason

I am tired of Credit cards. I have never carried a balance, but I have always been living a month behind. Not anymore, remove the temptation and enjoy earning interest for not spending beyond you means.

5 Matt Jabs

My wife and I just combined our checking accounts and we also built up a “month cushion.” It sure does ease the mind when you don’t have to worry whether or not you have enough $ in your account.

6 Barbara Weatherly

you both might want to have a separate savings account in each of your names, just in case God forbid the worst happens. This happened to a friend of mine and he couldn’t have access to his bank accounts when his wife unexpectedly died. the bank (I do not remember which one but it is one of the “too big to fail ones) let him have access to the accounts until he had a death certificate and a court order.

7 Matt Jabs

Nah, all our accounts are joint and we have all login data and passwords logged. Simple.

8 T

I would close any accounts you aren’t using and use one card to collect rewards as long as there’s no annual fee. If they add a fee, get them to refund it and close the account.

I use my credit card for pretty much all of my purchases and pay it off in full every month. Spending $2000 on mandatory items (and non-mandatory items) gives me $20 in free groceries. I get hundreds of dollars a year in free groceries. Like over $300!! That’s like a month of free groceries every year!! We normally cash them in around Christmas time since our grocery bill is a little higher at that time since we are home on vacation. If you don’t plan to finance stuff in the future, your FICO score shouldn’t matter too much if you have a good credit rating. I don’t think closing unused accounts would make a good credit rating become bad if you have been paying everything on time and haven’t declared bankruptcy and don’t have any accounts in collections.

I was living a month behind, but this summer I adapted the YNAB method (You Need A Budget). Within the next couple of months I’ll be living a month ahead. So any money I spend will have been earned last month. I set up a budget and keep track of every purchase I make. Any income I make will get delegated to next month’s budget.

9 Matt Jabs

I do not plan on financing anything in the future, but know that FICO is used for a lot of other things too – like insurance premiums, etc.

Wow, that’s quite a savings… I’m not sure I would spend that much on my card. Do you find dealing with the rewards to be a hassle at all – like doing the paperwork, etc?

10 Peter

I’m pretty anti-credit card, as you can probably tell if you read my site. I’m not to the point though where i think you should NEVER have a credit card. Personally when we became debt free we cut up all of our credit cards (like in the Dave Ramsey videos) and closed the accounts, except for one cash rewards credit card. I never use that card except for large purchases like vacation travel, high ticket electronics, etc – and ONLY when we have the cash on hand to pay it off right away. I usually check the account and as soon as the charge appears, I pay it off immediately.

With that being said I do think that some people who aren’t as in control of their spending really should cut up all their cards, so that the temptation isn’t there. I’m not a big believer in doing things to boost your almighty FICO score, and i definitely wouldn’t leave any accounts open just for that.

11 Matt Jabs

Temptation is not an issue for us – we’re solid there, mostly I just want to rid my life of bad relationships. The argument is whether I can have a good relationship with credit card banks when I completely disagree with their biz practices.

I also hate dealing w/the red tape – like… what do I have to do to actually realize my rewards, and will I lose them if I don’t do thus & so… that’s the kind of stuff I simply refuse to deal with – it’s just not worth it to me. I’d rather spend my time making homemade laundry soap! :-)

12 Mr. Not the Jet Set

See, that’s just the thing – no matter the laws, the rewards, or our behaviors – I can’t support what they do and the way they do it. It’s no different than Wal-Mart. Sure, we could probably save money by shopping there – maybe hundreds per year. But we cannot support their business practices. Plain and simple, we don’t walk in the door. It’s a moral issue for us.

As for the rewards red-tape… we can laugh about it now, but I used to throw the letters away. They looked like junk mail! And this was with Discover. And once they’re gone, baby they’re gone!

13 Matt Jabs

Wow… it’s funny you mention WalMart – my wife and I officially started boycotting the place about 6 months ago for the same reasons!

We do not agree with their business model, do not like how they put local biz out of biz, and prefer supporting our local community. Since we stopped going we have been SO HAPPY about the decision. I think it may end up being the same thing with the credit card banks! :-)

14 Jess

I am new to your site, an applaude you for your courage, and strength to get ahead. Been struggling with finance for a while, and stumbled on your site only minutes after starting my new batch of museli a.k.a. granola! How funny! Congrats on living frugally, how empowering it is!

I just want to comment on your point “The argument is whether I can have a good relationship with credit card banks when I completely disagree with their biz practices.”

I guess this raises a problem in terms of a commitment to helping others. Unfortunately these companies are solely in the business of making money. When you accept the benefits of using a credit card wisely, you are not recovering that interest you have wasted at an earlier time, it is not handed back from the kitty of some over-paid executive. Most likely it is the interest being paid in by someone else struggling with their finances.

Can you have a good relationship with these people? Just a point to ponder.

15 Mike Piper

For me, to not use a credit card is a waste of 2%. My wife and I were both lucky to have parents who taught us about the dangers of debt, so neither of us has carried a balance.

Though I completely understand why somebody who’s had trouble with them in the past would just want to cut them up. I do similar things in other areas of my own life. (Example: Can’t keep cookies in the house, or I’d never stop eating them. :-)

16 Craig

Keep them open. You can always just charge the minimum on there to keep it active knowing you are going to pay it off in full each month.

17 MLR

I’m definitely of the crowd that says you should use the rewards. If you don’t, it’s like leaving money on the table. If your company matches your 401k up to 4% and you only invest 3%, it’s also like leaving money out on the table… which you wouldn’t do.

As long as you control your spending and don’t get crazy because of the plastic, keep ‘em.

Obviously I’m not a fan of emotional reactions to things revolving numbers and money. The credit card companies will still make money off of you (merchant fees), but at least you get something back.

Here’s the thing, though. Don’t make your decision because of potential credit score effects. If your credit score goes down because of it (which it may, you are shortening your credit history), so be it. If you ever need a loan you can get manually underwritten. That’s what they did before FICO, and they can still do it.

MLR

18 Matt Jabs

If that truly is the case (FICO), which it seems to be… then I’m really left with two decisions – which the poll also reflects:

1. Close em & forget em
2. Use em for the rewards & laugh all the way to the bank

Right now I’m leaning toward option #1, but still not 100%

19 Barbara Weatherly

I hope you go for number #1

20 Matt SF

I’m all for…

Risk fees, leverage rewards, and laugh all the way to the bank!

To me, a credit card is just a tool. Use it, take care of it, and keep it around in case you need it.

If they try to throw an annual fee at you, let them know you’ll cancel the card immediately. If they don’t waive the fee, then cancel it on the spot. There are few credit cards worth paying a fee, in my humble opinion, when there are so many cash back cards on the market.

21 Matt Jabs

You know what’s crazy… I am the king of calling to cancel fees, or get a discount, etc. But I did not call them – I just paid the fee. I’m not sure why, I never do that.

Thanks Matt, I think I’ll call tomorrow and do just what you suggested! I’m getting my $29 back!

22 Kelly

Are you worried about your credit score? If not, shred ‘em and forget ‘em. You are building credit by paying off your other debts.

If you feel like you need them to help your credit score, keep ONE open, and don’t worry about the rate. Make sure it’s one that doesn’t charge you an annual fee though. Put any recurring monthly expenses on it-like cell phone, Netflix, etc. and set up an automated payment from your checking account. Good credit and a keeping a card open in case you need it for larger purchases.

I personally feel like having one card is the best option. You want the protection a CC offers when you make a large purchase. Cash is king, but credit cards offer certain protections.

23 Matt Jabs

Good points Kelly.

I’m not “worried” about FICO, but don’t want to close the accounts if keeping them open & paid off will raise it quickly and significantly.

I did recently open an account w/a local credit union and have a CC that pays .5% on the dollar, so in the long run that is the only card we will have and use.

24 Paul @ FiscalGeek

I’m solidly in the camp of the shred it and forget it. I honestly feel that credit card rewards programs are like rebates. There’s only a tiny minority of people who are able to jump through the hoops and actually obtain the rewards. Ditch em Matt! You don’t want to be on the sort of Debt Free Adventure.

25 Matt Jabs

Yeah… trust me, I am really feeling that argument.

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27 Eric J. Nisall

I agree with Matt. Credit is a useful tool, that when used properly can be of great benefit to the user. As was mentioned already, many cards give you rewards, and if you are financially responsible, then you can come away with quite a few perks. Besides rewards or cash back, credit cards provide something more important–security. If you lose cash, you are out of luck. If you feel that you got ripped off by a merchant or the product oir service wasw substandard, the credit card company backs you and assists in resolving the situation. In many cases they provide travel insurance built-in. Cash cannot make any of those claims. Again, you have to be financially responsible and disciplined to use credit (which is something I probably repeat ad nauseum on my own blog), but if you are there is no reason why you cannot maintain both: credit cards and a consumer debt-free way of life.

28 a.b.

I’m all for using the rewards as long as the overall reward value will be higher than any annual fees you would incur and as long as you can keep your spending under control.

I look at it this way: Once everything’s all paid off, the cards will give me between 1-5% on rewards, depending on the purchase. My ING account is barely hovering over 1%. I put my money where it will make the most money for me, and I like the idea of incurring interest on my purchases as well as my savings.

My plan when the cards are paid off is to automate small purchases on each of them. My netflix, cell phone bill, etc., will all get automatically submitted to a card, and then the cards automatically paid through BillPay as due. Maintaining a good FICO score is important to me though, as we might want to buy a house in the next two years; after that I’m not sure I’ll really care about not closing cards. Although I would be very interested in hearing more about what MLR was mentioning with manual underwriting.

29 Lakita

I’d be interested in HOW MUCH and HOW LONG closing a card impacts your score. If you have a card with an annual fee that you are not using, a decent credit score, and no major purchase coming up in the near future…I would say close the card.

On the other hand, if you are about to buy a house, or any other major purchase or change where your FICO is a factor and you know you are in the “every point counts” category….then keep the card open.

I’m debating rather to keep a card with an annual fee, no rewards but credit history. When I am being offered a card with lower interest and rewards.

Maybe I’ll try Steve’s modified envelop system and go for the best of both worlds. I haven’t decided yet. Annual fee won’t hit until next summer so I have some time to make up my mind.

Kita

(PS: Matt…check the banner I added on the Zero Balance link…haha…that was fun!)

30 Wil

I haven’t paid a credit card fee in several years. I use my cards for practically everything, including my medications, gas, groceries and cell phone. 5% rebate on gasoline is reason enough for me to use plastic, the rest is just gravy.

Like someone said earlier, a credit card is just a tool. If it doesn’t work for you, by all means cut it up.

31 Jon

Haha, why would possibly want a higher Debt Score? I mean FICO score? Personally, I want FICO to say huh? when someone tries to run my credit report! :)

I understand that a lot of people use credit cards responsibly but most don’t… And apparently we are in that group… :)

We paid off our only card last month and promptly closed it. We had shredded the cards months before…

Which ever you choose I pray blessings for you Matt and your family!

32 BG

I’m with Jon above — who cares what their FICO score is? Unless you are planning on buying a house soon, forget FICO. What we did with our credit card was we literally “FROZE” the thing — in a block of ice in our freezer. It was there if we needed it, but it’ll take a while to thaw it out. I think you should keep one card always, for car rentals or online purchases (airline tickets, etc).

Other than that, we use cash / debit cards.

To the people playing the “rewards” game: where do you think this “free” money is coming from? The answer is: others just like you who got into the situation where they could no longer pay the card off each month. That CC industry LOVES you guys, and they will wait you out!

33 MLR

You can forget FICO even if you are buying a house. I mentioned it in my above comment — but you can get manually underwritten if your FICO score doesn’t represent your true situation.

The free money is coming from the merchant fees they collect on your transactions.

34 Peter

What is the obsesion with FICO?

From the blogs, it seems like people are trying to beat the house!

If you are going to go without a CC, then go all the way.

35 Matt Jabs

I will be choosing one of these three approaches, just haven’t decided yet… but all these great comments are helping to narrow it down.

36 Eric J. Nisall

@BG & MLR: Not to be argumentative (well, maybe just a little), but where do you think the those same rewards that the debit cards offer come from? And they do offer rewards, such as purchase points, as well as those cash rebates that Wachovia and Bank of America offer (the “Keep the Cash”-type where they match a certain percentage). It is from the same merchant fees that are incurred every time you swipe the debit card plus the overdraft fees, returned check fees, low balance fees, ATM fees, etc. There is no real difference between debit and credit in that regard.

And, for anyone downplaying the importance of a FICO score, have you been hearing about it’s use in determining insurance premiums, as well as its increasing role in the hiring process? Your credit history is being used for much more than simply your risk in the eyes of lenders.

Just out of curiosity, where exactly can you co for a “manual underwriting” anyway? And, who on earth would take someone’s word at face value that are not a credit risk without seeing proof. That is exactly what the credit report and FICO score are.

37 MLR

You are correct about the rewards, but will my debit card extend my warranty on my laptop an extra year? Will it allow me to dispute a charge by issuing a chargeback? And if it does allow me to dispute, will the debit card give me my money back while they investigate? The answer to the last question is no… which means my money could be tied up over a purchase where a retailer shafted me. Credit cards offer more protection than debit cards, that is hard to dispute IMO.

I do know your credit score is used for a lot of things, but for the most part they (insurance, employment) aren’t as scrupulous as a bank.

And where do you go for manual underwriting? Pretty much any bank that loans out money. They have to manually underwrite in a lot of circumstances. For example, you don’t receive a W-2 because you are self-employed. They need to do a manual underwriting to verify your income. Just because your FICO is low doesn’t mean you can’t get a loan! A FICO score isn’t a perfect enumeration of risk, as we should all be aware of by now.

38 BG

Eric) Thanks for the information about the “Keep the Change” program. I hadn’t heard of it. Looks like BofA will round all purchases up to the nearest dollar, and debit from checking that amount, and “put the change” into your savings account each time the card is used. BofA will also match 5% of “the change” into the savings account up to a max of $250 a year as a reward. The reward money won’t show up until 14 months after enrolling in the “Keep the Change” program though…

You are right that this reward is not coming from interest paying people, because there is no interest on debit accounts.

39 Matt Jabs

@Eric: I do not agree w/all the merchant fees etc, but at the same time I use a debit card regularly… so I suppose that point is moot. Also, I don’t like jumping through hoops to get rewards, and don’t like the fact that if I do one thing wrong I get hit w/crazy fees that threaten to wipe out any “rewards” I do get.

After awhile I just want to shred ‘em, close ‘em, & forget ‘em! :-)

@MLR: All the above said, the extra perks of protection are nice, but for this I am going with a personal “Extended Warranty Fund” (post forthcoming.) I see your point with the charge dispute thing, so that is definitely something to take into consideration.

40 H Lee D

I live in the identity theft capitol of the country, so I keep open only accounts that I am using. I have two credit cards: one that my bank gave me because I have an account there. It is in my wallet, but I have never used it. ICOE. I have the one that I put everything on and pay off in full each month.

I had others from stores, but I closed them all. I had one other that I used to use all the time (the rewards program was better), but the rewards program on the one I’m using now is better.

Interestingly, on a tangent, hubby and I had a budget all worked out – modified month-to-month as needed, and we were terrible about sticking to it. Then we started to keep just a spreadsheet of money in and money out, with a running total at the bottom. Now, even with both of us taking pay cuts in August and $1100 in additional medical expenses this month, we’re on budget. And when we have money left over (as we now frequently do), we split it between the emergency fund and our “fun money” pots. Not sure why this is working better, but it is, so it’s all good!

41 Matt Jabs

This is a great testament to two things in which I am a firm believer:

1. The spending journal – this is a MUST if people want to successfully keep a budget. It is the foundational building block that most people do not use… and therefore fail to keep a working budget for any length of time.

2. Simplicity – I love keeping things as simple as possible, especially in this tech laden society we live in. A lot of the time nothing beats good ole pen & paper!

Cheers

42 Mr. Not the Jet Set

Matt –

I guess it’s clear where my vote is!

But I will echo some of the other comments on FICO scores – As soon as you start making decisions based on the affect it will have on your FICO, then you have your focus on the wrong goal. FICO scores do not indicate financial success.

43 Matt Jabs

Financial success for me means freedom from debt… so FICO is definitely not my goal, but I also would like to keep my score high if I can do it painlessly and simply.

44 Mr. Not the Jet Set

Good! Then you have the right goals in mind (I knew you did!).

As for FICO, I always like Dave Ramsey’s perspective on it – You shouldn’t do things to intentionally torpedo it, but making decisions in an effort to maintain or boost it usually leads you to bad places. It’s an “I love debt” score. When people look for ways to ‘game the system’ and boost their score, it always involves debt in some way. It may not be long-term debt – it may just be within the grace period, but that is debt.

In your situation, you just don’t want it to drop and adversely affect stuff like your car insurance (which is a whole other can of worms). That is reasonable. My wife canceled her cards 4 or 5 years ago, and we’ve been consumer debt-free for 3+ years. She still has a great score (around 800 if I recall correctly). We saw no ill affects. How could this be…? We pay our mortgage and pay our utility bills.

Focus on paying bills, focus on paying down debt, focus on solid money habits and behaviors. The FICO is just noise.

45 Steve in W MA

Thanks for the highlight of my comment, Matt!

If I had known my comment would get highlighted I definitely would
have done a better job writing it instead of so off the cuff though.

There’s one thing I’d like to emphasize from my comment:

The most important and fundamental point about the idea of using your
credit card as the means to “pull the trigger” on the purchase while
using the Cash Envelope System is that I first physically go into the
cash envelope and actually view and touch the money to count it and
see that there is enough for the purchase first before making the move
to pull out the credit card. That’s psychologically very important,
as it continues to train the use of the Cash Envelope system for those
easy-to-blow budget categories. In my experience, staying within the
Cash Envelope system for these Food, Gas, and Fun categories is the
main thing I have to do to keep my entire budget on target. It’s
basically where the rubber meets the road when it comes to meeting
budgetary targets.

My adding the little credit card move at the end of what is otherwise
a cash transaction just adds like 10 extra horsepower to the ride.
It’s just supplemental and you don’t want to sacrifice the “engine” of
your budget for an add on like credit card usage. I would suggest 3 to
4 months of straight Cash Envelope spending before adding on this
little trick to the end, because as far as I’m concerned the cash
envelope system is the king of practical budgeting tactics, second
only to having a budget in the first place.

If you don’t have a rock solid way of *knowing for a fact* that,
indeed, this month you didn’t spent a cent more on (insert budget
category here) by using your credit card than you would have by using
cash or your cash envelopes, then I am willing to bet that you are
*spending more using the cards than you could possibly save or earn on
rewards*.

This is based on my own experience so it is biased but I believe there
is plenty of backup for believing it to be true.

46 Eric J. Nisall

@MLR: Thanks for the info. Never had any experience with that before.

47 Steve in W MA

As to the question of whether leaving the account open and unused will negatively affect your FICO score, it will not. The FICO store will at least stay level if not improve if you have an open line of credit on a credit card and it is unused. As to whether the c.c. company will cancel your account if it sits unused, I have 2 accounts that I haven’t used in 2 or more years and they still are open and the credit card companies have made no noise about closing either of them. Not to say that it can’t happen, but I really wouldn’t worry about it. At the most I would advise marking it on your calendar once or twice a year to use the card for a $20 or so purchase and then pay it off if you are concerned about a potential “lack of use” closing of your accounts.

48 Matt Jabs

All good info Steve… I was happy to feature you system and think it is really cool that you have found something that works so well for you.

Yeah, like I said above, I’m not super worried about FICO… I just don’t want to close the paid off accounts if keeping them open for a few months would increase my score.

49 BG

Matt) As far as I understand it, when you close an account, FICO no longer considers any “positive” information from the account. If you had a CC, and it was in good standing for 7 years, and you close the account: it is as if you never had the card.

But, if there is negative information on the closed account, that information will live on through your FICO score.

Keeping them “open for a few months” will not help your score if you do cancel the cards: your score WILL DROP when you close the accounts.

As someone else said earlier: FICO is an “I love debt” score. If you want a high-score you need to play their game…

50 Matt Jabs

Well if that is the case then I will quietly bow out of the game.

I’ll look into this, thanks for the info BG.

51 Kevin@OutOfYourRut

Just my opinion for what it’s worth… if credit cards have been a problem in anyway in the past, I think you have to get rid of them. Maybe keep one for those times when it’s absolutely necessary.

If you have one card with low utilization, that should be enough for your credit scores. I’d rather have a somewhat lower credit score, and fewer tempations in my path. Utilization is only one of many elements of a credit score, and it also suffers from diminishing returns.

Sometimes having multiple cards with generous (unused balances) is more about our egos than anything else.

52 Matt Jabs

Honestly… neither of us feel any temptation and haven’t for quite some time now. The last time we went into CC debt was by necessity and lack of a proper Emergency Fund, not due to temptation.

I haven’t really felt tempted to use a CC frivolously since my college days.

53 BD

It depends entirely on what sort of person you are. You have to know yourself, your weaknesses and your strengths very well before you can answer this.

In my case, I have two credit cards. One sits in a lock box and almost never gets used (except once in a blue moon for gas, so as to keep the account active). It’s just there to raise my credit score.

The other credit card is my USAA Rewards Card. I put everything that is in my Budget on it (food, medical needs, gas), and pay off the full amount faithfully every month. In return, I get Rewards, which I then cash in every fall for Christmas Gifts for family. For example, this year, I have enough Rewards saved up for five $25 gift certificates at a variety of major retailers. That’s $125.00 FREE dollars gained just from putting the year’s necessities on the credit card. My total interest for the year was .71 cents, and that was only from a miscalculation on my part one month.

I have very little temptation to spend frivolously, so for me, it’d be silly NOT to have my rewards card, since it earns me over a hundred dollars in free cash each year just for using it.

So you have to ask yourself REALISTICALLY how disciplined you are. If you are the sort that can stick to a budget, put only the necessities on the card (Starbucks is NOT a necessity, nor are video games or books), and pay it off in full each month, then you SHOULD have a good rewards card.

But if you’re the sort who’d be easily tempted to add that latte to the card, or buy the kids ‘a little something’ each month on it, or ‘that nice pair of shoes on sale’ for yourself, then it’d probably be better that you shred/freeze the cards, and just keep the accounts open for FICO purposes, but not use them.

54 Matt Jabs

Thanks to my lifestyle change over the last year I’m not tempted to spend anymore. I actually thrive on not feeding the consumerism monster in our country… so that is a blessing.

55 Eric J. Nisall

@BG: I don’t like those programs at all. They take money out of the account to make it seem like forced savings, but really what is more realistic is the chance that people will become overdrawn because they do not take into consideration the transfers. This is especially true of people who use debit cards for everything, and if they use it enough they could end up being several dollars short particularly if they only keep minimal amounts in their regular accounts. Seemed like a nice idea to re-introduce saving to the people, but poor in its execution.

@Matt (Jabs): Yeah, it is pretty much a moot point since I believe that regardless of how you use the debit card (either by signing or pin code) the same fees are charged for the processing and interchange since the transactions are identical to credit cards. The thing I like most is the ease of having as many recurring bills as I can put on the card, and essentially automating my monthly expenses, thereby having fewer transactions on the bank statement since banks generally do not provide year-end summaries. In fact, banks for a lot of electronic transactions do not even provide a very detailed description on the statement (some even make it difficult to determine the merchant). I don’t really worry about the rewards, and just buy what I can afford to pay for in total each month. I figure the rewards are just another way of maximizing what my money can do for me, and even if the reward is only enough for something small, it’s still better than getting nothing and it isn’t a hassle for me, personally. I don’t judge, so whatever method suits you best I applaud the fact that you simply have found one and are taking control over your money rather than letting it control you like many people do.

56 Matt Jabs

Taking control over your money situation is a powerful feeling – one that I never intend to lose again!

57 JMK

I’m annoyed when I can’t put something on my credit card. So far in 2010 we’ve only taken $120 out of the bank and $60 of that is still collecting dust in our wallets. We just have no need for cash most of the time. To me paying with cash/devit feels like a missed opportunity to get rewards for a purchase I was making anyway. I cannot pay my property taxes or electricity bill by credit card, which is unfortunate as those are two of my largest expenses every month. I have all the regular monthly bills going on the card automatically (cell, phone, internet, life/house/car/camper insurance) plus all groceries and gas. Our card earns flight miles (Air Canada) and in the next few weeks we’ll have the last few miles we need for our family’s four tickets to Europe this summer. Got to love free travel just for doing what I would have done any way.

As many other have said, if you can’t trust yourself not to put extras on the card, then get rid of it. Kind of like a recovering alchoholic wouldn’t keep a stocked bar in the house. It’s just too tempting. Our normal mode is not to spend at all (other than the items above). We spend so rarely on clothing, restaurants etc that we don’t even budget for it. We all have more than enough clothing so we only buy (second hand) to replace as things wear out or the kids outgrow something. We only purchase household items to replace worn out items, and if we still need to have that item. Shopping is not a leisure activity and we don’t generally go into a store unless we have a purpose and a list. We live on ~55% of our take home and the rest covers the odd incidental, but usually I skim off the excess every week and move it to our retirement accounts or make an extra mortgage payment. I certainly don’t spend a cent extra because I use the card, but I want the rewards available for what I do spend. Also, I pay off the card WEEKLY. I know I don’t have to, but I like to monitor the transactions and move all the actual charges over to our spreadsheet to replace the estimated amounts we planned for the week.
I generally have a year planned out in advance so it’s easy to put in test numbers to see the long term impact of an extra large mortgage prepayment, or booking a vacation. I can also test the impact of a layoff simply by deleting the salary amounts for one of us and seeing how far down the line it will be come a problem. I expect to be laid off in the next couple of months and if I haven’t found a new job by then I already know that if I just stop the extra mortgage and retirement savings payments we can coast nicely on one salary for 8-9 months with no change to our lifestyle, and that’s without including unemployment benefits. Being free of consumer debt and living massively below your means sure takes the stress off in this economy.

58 Matt Jabs

Sounds like you’re doing great. The people who do have a problem are the ones who cannot live a disciplined financial life – regardless of whether or not they use cards.

59 Lisa Shafft

I just paid in full 2 of my credit cards, I just checked them and 1 says I still owe them money. Can banks still charge you even if you have no balance,and if so what can I do to stop this from happening? If I cancel the card who long would it hurt my credit score? Also if I do cancel them what can I do to boost my score back up. I still have 1 credit card with a balance of 800.00. Any thoughts? Thanks, Lisa

60 michael

I wouldn’t use them, but keep them if you don’t have to pay a fee especially if you’re not tempted to use them, unfortunately there may be a time or two when its the only way to pay for somethung. You should keep in mind that even if you do use them regularly for everyday purchases and pay them off right away, they still make money for every transaction. So using it makes them money. Credit cards are one of the biggest scam companies ever created, second only to the banking industry. Peace.

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