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Cash and Carry
Leaving credit cards home has positives and negatives
AP Photo
Kira Limer pays cash for a book at a Barnes & Noble in New York. The idea of cutting out credit cards is gaining popularity at a time when Americans have run up more than $850 billion in credit-card debt.
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Published: September 21, 2008
NEW YORK - Here's one way to dodge credit-card debt and late fees. Don't carry any plastic.
"People look at me like I'm an anomaly. But guess what? It's a whole lot easier when you're not juggling debt," said Paige LeFevre, 41, of Atlanta.
The idea of living without credit cards is being given more consideration at a time when Americans have more than $850 billion in credit-card debt, four times as much as in 1990.
Of course there are significant benefits that come with credit cards -- convenience being just one of many -- so be sure to weigh them carefully before rushing to close your accounts.
A key concern is the role that credit cards play in building your credit and maintaining a credit history. Remember that building good credit is important if you're in the market for a mortgage or other type of loan. Prospective landlords or employers often run credit checks, too. So holding on to your credit cards -- even if you don't use them often -- may be in your best interest.
Credit cards also offer certain consumer protections. For instance, issuers will often refund charges for faulty products. Cards are also necessary to rent a car, and, if managed properly, can reap financial perks through rewards programs.
LeFevre says her vow of plastic abstinence came after she ran up $40,000 in debt while remodeling her home two years ago. But as a homeowner with a steady job for six years, LeFevre wasn't overly concerned about her credit score. She says she hasn't checked her credit score in recent years, but figures it's better when she's not buried in debt.
"It's just too easy to use," said LeFevre, who works for a retirement-investment advising company.
She has since paid off her debt with a number of drastic measures, including trading in her car for a cheaper model, getting a roommate, and selling many of her belongings (camping gear, jewelry, bicycle). She also eliminated her cable package, manicures and eating out. Now she keeps her spending in check by taking out $200 in cash every week for groceries and gas.
For LeFevre and others, keeping plastic around simply leaves the door open for temptation. The reasons for credit-card debt no doubt vary, however, and in many cases it is the result of financial hardship.
According to the Consumer Federation of America, a nonprofit advocacy group, 58 percent of people with credit cards don't pay their balance in full every month. Those that carry a debt have an average balance of $17,103, according to the group.
It's no wonder Americans are easing up on credit-card use. Last month, Mastercard Inc. and Visa Inc. reported credit-card spending was growing at its most anemic pace ever.
So how can you cut back? One way is to simply leave your credit cards at home for a few months at a time. A credit card needs to be used about only once every six months or so for the credit line on the account to count toward your FICO score, said Barry Paperno, a spokesman for Fair Isaac Corp., the company that created the FICO credit score.
Actually, making small charges on your card once every few months may improve your score more than frequently running up big charges, Paperno said. That's because your credit utilization -- the percentage of your credit line that's in use -- makes up 30 percent of your score. So the smaller your outstanding balance in relation to your credit line, the better.
For the same reason, keep in mind that closing your credit cards could lower your score if you have outstanding debt. If you're still determined to rid yourself of plastic, try to whittle down your balance before doing so. Cancel one card at a time, and wait a few months in between each cancellation to lessen the effect on your score.
How credit-card use affects your FICO credit score
A FICO credit score is made up of five factors of varying importance. Here's how your credit-card use (or lack thereof) can affect each of the components.
Note that the weighted importance of the categories are averages. For some people -- such as those who haven't been using credit for long -- certain categories may count more heavily.
■ Payment history: This accounts for 35 percent of the FICO score. The score will take into account how late you were, how much was owed and how many late payments there were. If your overall report is strong, a few late payments shouldn't be a score killer.
■ Credit use: Thirty percent of your score is determined by your credit-utilization ratio, which measures your outstanding balance against your available credit. So if you have outstanding debt and cancel a credit card, losing that line of credit will mean you're using up more of your credit -- which will lower your credit utilization and thus lower your score.
Experts say it's best to use less than 30 percent of your available credit. Generally speaking, the lower the percentage the better.
■ Length of credit history: This determines 15 percent of your score. So if you're closing credit cards, keep the card you've had the longest.
One alternative to closing your accounts is letting them sit. But you should check on them occasionally to make sure identity thieves aren't using them.
If you want to make sure your credit cards are counting toward your credit-utilization ratio, you should use them at least once every six months or so. Otherwise, that account will show up as being inactive on your report and the credit line won't count toward your line of credit.
■ New credit: This makes up 10 percent of your score. And signing up for new credit cards doesn't always raise your score because you're adding to your line of credit. Instead, it can lower your score because you may appear to be a bigger risk.
■ Types of credit in use: This makes up the final 10 percent of your score, and looks at whether you have a mix of different types of credit, such as installment loans or mortgages. It's good to have a history of revolving accounts -- such as credit cards -- so think twice before completely giving up your credit cards.
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