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This article is by staff writer Adam Baker, whose own blog paid homage to the movie, Fight Club, with the post Tyler Durden’s Guide to Personal Finance.
While I generally check my credit report every 4 months or so, the last time I checked my credit score was November 2008. At that time, it was right at 740. Earlier this week, I checked my credit score again. I was pleasantly surprised to find out it was 730+!
Why would I be pleasantly surprised that my credit score has dropped between 5-10 points over the last 16 months? Because that’s when we stopped playing the credit game.
In early November 2008, Courtney and I not only canceled our credit cards, but also paid off our only non-student installment loan. The following month, we decided to take it a step further and close our final remaining credit card.
For the last 15 months, we’ve lived free of credit cards, other revolving credit, and traditional installment loans. (We still have student loans). While this has had an overwhelming positive affect on our financial life, it was supposed to have a dramatically negative affect on our credit scores.
After all, the following graphic is from myFICO’s “What’s in your FICO Score?”:
According to the graph and the information on the site, we have several strikes against us:
- The length of our active accounts would obviously be affected. Several of our credit cards were 4-5 years old. Canceling them reset the length of our active revolving loans back to zero.
- The type of credit used would be less diverse. We didn’t have a mortgage and now didn’t have any active revolving credit, either. I’ve read that FICO likes to see an installment loan that isn’t a student loan (for example, an auto, jewelry, or personal loan). We’re now lacking that, as well.
- Our overall credit limits were all but eliminated. Previously, we had close to $15,000 in credit card limits. This was obviously reduced to $0 by closing the accounts.
To be fair, we did have several factors working for us:
- Canceling our credit cards didn’t increase our utilization rate (the percentage of our limits we actually use). When you don’t have a balance, the utilization rate will always be zero, whether your limits are $10k or $0.
- My payment history has no negative marks. It’s certainly possible that my punishment for canceling my accounts may have been augmented had my history shown several negative marks. A clean payment history may help counteract the downside of canceling the accounts.
- We have no dings from new forms of credit. In addition to closing our accounts, we also chose to place a credit report freeze on both of our reports. As a result, we’ve had very few (if any) checks on our credit and certainly no newly opened accounts.
Could my credit score be even higher?
It’s very possible that even though my credit score hasn’t tanked, it could be much higher. Had I not canceled my credit cards, maybe my score would be 750+ or 760+! There’s no way to know for sure, but canceling my credit cards may have caused my score to stagnate.
Another possibility is that FICO’s algorithm may still need more time before it begins to punish my “negative” behavior. I find this theory less likely, as it’s been well over a year. Over time, maybe the score will slip more dramatically.
On that note, if we keep up our current pace, we’ll eventually cease to have a credit score at all! It can be argued whether this is good or bad, however you’ll be hard pressed to convince me that executing our current plan for another 5 years will put us in a bad position financially.
So what does this all mean for you?
It’s important not to draw any sweeping conclusions from a single example. I fully expected my credit score to drop more than a mere 5-10 points, based on the information I’ve been reading for the past two years. It would be irresponsible to assume canceling your own credit cards would yield a decrease or an increase in your score based on my results.
At the same time, my sample case study has caused me to reevaluate just how much we know about the algorithm used for calculating your credit score. After all, no one knows the exact formula. All we have are graphs and lists of potentials factors that may be taken into consideration.
The only universal lesson that can be extracted from this is to ensure that an estimated change in your credit score isn’t the primary influence on your major financial decisions.
Of course, you should have any and all information you can. I’m not suggesting we should all ignore the information that is available about the make-up of credit scores. You should absolutely consider it. Just be wary of letting it dictate any major financial decisions on its own.
A week ago, I considered myself fairly savvy on the topic of credit scores. Today, I’m not so sure anymore!
(Note: Divine Caroline also has some tips on Six Sneaky Factors that Affect your FICO score.)
This article is about Credit Cards Wednesday, 24th February 2010 (by Adam Baker)
I am glad to hear that your credit was not adversly effected by cancelling cards. I recently cancelled some cards that I was no longer using. One account had been opened since 1991. This was about a month ago. I am about to pull my report and I am curious what I will see as well.
Quick question for Adam! I love reading your blog and your adventures overseas. But with all the traveling you guys do, how do you book plane tickets without a credit card?
My credit score remained above 800 after I closed my credit cards in 2007. I did eventually open a new credit card account because I “needed” it for business travel (now we also use it for personal travel too). Basically I was tired of fronting the money for my business travel and then waiting to be reimbursed by my company.
At present we don’t have any debt except mortgage debt and my credit score is still above 800.
Don’t understand why the credit card company keeps raising my limit. I always pay it off every month. Are they trying to get me to use more credit? Is it better to allow it to raise or should I bring it back down?
I cancelled about 10 credit cards when I went debt-free abut three years ago. Out of curiosity I checked my credit score recently with the three bureaus and they averaged 780. I have a perfect payment history so maybe that helped keep the score up. Who knows, and who cares.
I can spot another Dave Ramsey fan a mile away, Baker!
I’d be willing to bet that your credit score won’t be “adversely” affected until those closed accounts begin to age significantly, especially if you always paid on time when you had them. The only thing that’s going to be affected immediately, it appears, would be your length of credit history.
That’s great to hear. The only thing I worry about is that in five or so years, we’re going to be looking for a mortgage and with the lack of a credit history, would that make problems?
It blows my mind that they are allowed to keep the actual formula a secret.
When traveling, a credit card is very useful. When traveling abroad, one better take a couple of credit cards just in case.
Just came across this page more or less randomly. Being from Germany, this is really a foreign/fascinating/scary topic to me.
The idea that not borrowing “enough” _de_creases the credit companies’ trust in you…
Checking into a hotel or renting a car without a credit card is a hassle, at best. Debit cards can be used but they will block off access to huge chunks of funds every time you check in and those holds take forever to go away. If you don’t plan properly for it, you can get hit with overdraft penalties. There’s a reason you might be worse off financially this route.
If someone needs to do a credit check for an insurance quote or a job application and your credit score is deemed too low because you cancelled all your cards and have no debt, you’ll be worse off financially by paying more for insurance or not getting the job.
If you want to buy a house, and you go to get a mortgage and your score is below 760 you will be paying more in interest over the mortgage by a significant amount than if you had the best rates available to the 760+ crowd. So you’ll be much worse off financially.
Do I need to keep going? I don’t understand why anyone who has the self control to pay off their balances in full every month thinks credit cards or credit scores are such a problem. They’re free to use and help you out with a 30 day interest free float, on top of the ability to dispute charges you don’t agree with and the “holds” being imaginary at hotel and rental car check ins.
Seriously, not my favorite guest post, JD.
What works best for you!
I love my credit card — lots of rewards. They are a tool — some people choose not to use this tool because it is kinda dangerous and you might take a finger off while using it…
If you know how to properly use the tool — it is a wonderful thing!
Adam: Congratulations on paying off so much debt, and thanks for sharing the impact to your FICO. I was surprised to read your outcome as well, that’s good info to know.
One question: will you ever use credit again? What if you have a large purchase you want to make (car? house? furniture?) How will you handle it? And how about unexpected emergencies - how would you handle those? Curious to know if you’ve decided to go all cash, all the time.
On ceasing to have a credit score - this means that your official “number” will be zero. (I know because this happened to me.)
If you need to actually use your credit score to do something like borrow money for a house, you’ll be unable to do so.
If you don’t plan on needing your credit score, then why are you bothering to check it?
I’m inclinedto agree with Adam, number 8, I don’t think there will ever be a day where I cancel my card (I only have one). There’s far too many services that are just unrealistically accessible without one.
I still do not get why people feel the need to cancel their cards instead of simply cutting them up.
Adam — what made you decide that it was better to cancel the accounts as opposed to cutting up the cards so they were not available to you?
In this scenario, the cards will be replaced when they expire allowing you to experience the lifestyle of no credit cards for several years without hurting your credit score.
Informative article Adam!
I often wondered what would happen if I took the plunge and canceled my last credit card. I’d say if you need your score anytime soon (6-12 months) then don’t make any changes that would adversely affect your score. For example, if your planning to by a house and want the best score possible to negotiate the lowest rates possible, then I wouldn’t do any changes that would risk the score going down.
I’d be interested to see if your score takes another hit or starts to rebound as you pay everything else down in a timely fashion.
where do you all check your score at? i am leary of checking my credit score… Since followers fo this site are concerned about their credit and money I figure i can trust where you all recommend to check the credit score. I havent checked mine in 3-4 years but would like to knwo where i am at. thanks!
I recently had a similar situation, but have yet to see what transpires in terms of my actual credit score. My Chase credit card was cancelled due to a new card card being opened (New Best buy card, with $2000 on it, also my max for that card). Apperntly Chase did not like the fact that I was at my limit on my new card. Funny thing is, I could have put $2000 on my Chase card, and recieve 19% interest on it, or use the Best Buy card with 0% interest. I did not think about it at the time, it was a no-brainer. 0% is WAY better than 19%…BUT the fact that I was at my credit limit is what spooked Chase. Due to my Chase card being canceled, I instalntly paid it off, and now just have the Best Buy card.
It was a valuble lesson-Never reach your credit limit-that I learned the hard way. I posted a topic about it on my site… It was quite an annoying experience!!
I don’t understand people’s fascination with credit scores. Are you planning on buying a house soon? No? Then don’t worry about it.
Is there any other use besides getting a mortgage? Small business loan, maybe?
@David#15 - Some people also get car loans. I wager, actually, that most people get car loans, even if we here at GRS all pay cash for slightly used cars
So there’s another reason to be concerned with your credit score, because you’ll get lower rates on your car loans.
I agree with Nate at #9. If you are responsible with your card and are able to pay off your bill in full each month then you can reap rewards just for spending money you normally would. Simply paying my everyday bills, groceries, gas etc has yielded me frequent flier miles, gift cards, and hotel stays. It’s a great tool if you know how to use it.
@#8 Adam
While this post might seem pointless to you, not everyone is disciplined enough to handle credit cards responsibly. For those people who just finished paying off huge amounts of revolving debt and plan on canceling their cards, this information is very helpful.
Please be considerate and understand that not everyone is like you. For example, I don’t travel, so I virtually have no need for a credit card for hotels or car rentals. I already bought a house, so the credit score is pointless to me. I would rather cancel the cards than risk pulling myself back into debt.
It’s all about what’s best for your personal situation, and only you can make the best decision for yourself. This article was obviously not intended for you, so please don’t insult the post because it isn’t tailored to your likings.
@David - Credit scores are used in many areas of your life. Having a good credit score can actually save you money on insurance.
Also, I have heard of employers looking at potential employees credit score.
I don’t think that’s right, but for many reasons, your credit score remains important.
There was recently a post on this on the simple dollar. After seven years, his past history will dissappear and then his credit score will take a hit. I’m not saying that he should keep credit cards, but that not enough time has passed to know the real impact.
Hey gang,
I’ll try to write a follow-up article about why we *did* cancel the cards even after getting to the point where we could easily control them.
It’s simply too big of a discussion for a follow up comment here.
A couple have asked *if* we plan on using credit again at all. The answer is actually no. We don’t plan on borrowing again (but aren’t so hardcore that plans couldn’t change eventually).
As for emergencies, if there were a true family need or medical need, we’d do whatever it takes to handle that. We’d easily go into debt or use credit for things of that nature. The specific emergency would dictate our priorities then.
Lastly, #8 Adam, can you explain your comments on hotels? Are you talking about a high-end chain or placing a reservation that you can cancel? I’ve bought my fair share of accommodations of all price ranges in several countries over the last 12 months. I’ve never once had and issue or a hold placed on my account (doesn’t mean it doesn’t happen of course).
As I pointed out in the article, my credit score hasn’t gone down much at all. I’m not sure what effect canceling credit cards really has. Like the hotel/debit card situation, I’m thinking it may be over-hyped.
Time will tell!
Thanks guys.
Another related data point: At one time I had heard Suze Orman advocate not using credit cards at all for a few months before applying for a mortgage. So, I did that when I first applied for my first mortgage. As a result, the fact that I had absolutely no outstanding debt at that time was raised as a concern by the lender (although I was approved).
From my experience working in public accounting for 20 years.
While many say that they pay their cards off every month, most people are not disciplined enough to do this. Most people run their personal financial affairs without a budget. Most business owners don’t budget.
Even people who for most of their lives are very good with their credit fall into the credit trap when pushed into a corner. A small business owner often uses credit cards to deal with cash flow problems. People who are unemployed and underemployed often use credit cards to pick up the slack. Folks who get divorced often used the credit cards they paid off every month just the same way they did when they were married, except now the household budget has been cut dramatically.
The real problem was the lack of planning, it’s just that credit cards can be a tool that makes it easier to avoid planning. Often, by the time the person realizes that they need some outside counsel, they have made quite a mess.
I have seen remarkably smart and responsible people fall into the credit card chasm because they got caught by life circumstances.
Another thought, credit cards and thus the credit score as we know it, are fairly recent inventions. The idea of credit and creditworthyness are about as old as the concept of money. It’s possible to live on cash only. It may not always be the most convenient but I’d be surprised if you found someone who absolutely would not take cash over credit given the choice. Even in the case of buying a house. It’s possible to save that kind of cash.
I have a credit card and I am working to pay off my debt. I’m not saying that I’ll do what Baker is advocating but to say it’s impossible or irresponsible is being dangerously close-minded.
We followed the Dave Ramsey plan and got rid of all of our credit cards as well. Our credit score did not fall much at all.
Lots of misinformation floating around.
I fully agree with Baker. He has seen the light. It is amusing how those who have yet to justify their behavior. I have as well.
When you are finally on the outside looking in, you realize how foolish it is. The game is better not played at all.
First…Credit scores are not solely used to determine insurance rates. That would be your INSURANCE SCORE. And unlike your credit score which is used to determine your likelyhood of paying back a loan, and insurance score is used to determine “likely loss ratio relativity”
Meaning the higher your debt load, the higher your ratio. (more possibility for fraud) So less debtload equals a BETTER insurance score.
And employment. Seriously. You are a candidate for a position and you explain that you have no score because you have no debt and are financially stable and you are worried about not getting a job based on that. Who would want to work somewhere that didn’t understand that.
And Like Baker, I have rented hotels, condo’s, cars, etc and never had an issue. Maybe thats becaseu a debit card functions like a credit card if chosen…actually functions exactly like one, so the rental process is identical. Never had a hold. Never had an issue. Half the time they don;t even know it is a debit card…they run it as a credit.
So enough with the stupid urban legends and myths regarding FICO scores and credit card necessity.
There is a massive difference between no credit and bad credit. Having no credit will not prevent you from obtaining a car or home loan. You simply have to document your bill paying ability through different means…like utility bills, rent payments, etc. YOU DO NOT NEED A CREDIT SCORE TO GET A HOME LOAN. It is a myth that you do.
In fact, you do not need a credit score for anything really. If you truly are creditworthy, there are several ways to prove it without the use of a all knowing secret model from Texas
I also placed a “do not sell” my information hold on both my credit report and my husband’s. Recently (within the last year) we really sat down and started reading those privacy notices we get every year from it seems like everyone! In them, it often states that they have the right to sell your information to “third party affiliates”. You can request that you “opt out” of that crap. Since we have made a solid attempt on opting out, and opting out with all 3 credit reports, we have DRAMATICALLY reduced the amount of junk mail we get. We often don’t get mail for half the days in a week. We also do not have unsolicited checks on our credit report at all since Equifax, Experian, and Trans Union are now not profiting off my information. It has had a profoundly positive effect. In addition, with not having those “pre-approval” offers in our mailbox, it makes it less likely someone is going to intercede one of those offers and open an account without our knowledge because they are not even our mailbox. I didn’t know about the credit freeze part, so thanks for that tidbit Adam!
I have to agree with Nate (#11). A credit card is a tool.
It helps me keep up with our exact expenditures and we usually get $200-$300 cash back every year. That helps with Christmas and birthdays since I can buy discounted gift cards or simply have the cash transferred to my bank account. My Discover also doubles warranties up to a year on my electronic gadgets (like the $100 digital camera we bought a year ago).
If you have the self-control to only buy what you were going to buy anyway, credit cards are awesome. If you don’t have that control, then I’d put them aside, but I wouldn’t cancel all of them.
Why risk your credit score at all? Off the top of my head, I know credit scores are used for loans/mortgages, employers, auto and home insurance rates, landlords, utility companies, and cell phone plans.
Having an open line of credit that’s in good standing isn’t difficult or risky. Simply charge a meal or something once every 6 months and immediately pay it off. If you are simply addicted to spending, I understand closing the accounts. Otherwise, why bother?
@Troy: Interesting…I had never considered a home purchase without an actual credit score, but I guess it can be done! Awesome. (By the way, I wonder if that’s changed in the current economy).
In any case, I see the old credit cards vs. no credit cards debate is back in full force.
To those who question Baker’s decision to close the accounts, I can say that I would do the same thing (if I wanted to get rid of cards entirely). Sometimes, putting things behind you is so much better than just putting them out of sight. It’s a psychological thing, I guess. And in Baker’s case, I think it was a declaration of victory…
@Troy & Baker (Sorry, read this after I responded to Troy) - In 2004 I rarely used my credit card, but did use my debit for everything. I wasn’t as disciplined back then so was afraid to use my credit.
I went to Chicago for the weekend while living in Bermuda, and while I was away Hurricane Fabian struck, killing 4 people on the bridge that takes people from the airport to the main island in Bermuda. So I was stuck there. I had used my debit card to check in, but had thousands of dollars in my account and didn’t notice any issue.
I flew to NYC where they have many direct flights to Bermuda, waiting for the airport to reopen so I could fly home. Each morning, I would wake up, check hotels.com or priceline or whatever, reserve the cheapest room I could in NYC, and go check in at 3pm. Each time I checked in, I used my debit card.
About 5 days into this, airport still closed, I went and checked my bank statement online, and found my available funds was down to $200, even though my actual funds was over $4000. I called HSBC, my bank, and they said the chain hotels from Chicago to NYC had placed holds on the funds every time I checked in to a new hotel, and I would need to wait for them to clear before I could access my funds again.
I remember reading recently that rental car places are not accepting debit cards due to the problems they have caused with holds.
@Troy- thanks for your ALL CAPITAL ANNOUNCEMENTS. Shouting does not make your statements facts.
@Shane #22 - I appreciate that not everyone is disciplined enough to keep credit cards. That’s why in my post, I stated clearly that “I don’t understand why anyone ***who has the self control to pay off their balances in full every month*** thinks credit cards or credit scores are such a problem”. If you don’t have the self control to pay off your balances, then you need to stay the heck away from credit cards because they are disgustingly expensive.
But for anyone who does pay them off, why not use them? What are they costing you? For me, they cost nothing and the benefits are numerous.
I don’t know why people who don’t use credit care what their credit scores are. The standard excuse is “oh, but I’m going to buy a house someday and I’ll need it then!” Really, if you can survive without credit for years, and manage to save 20% to put down, and you go looking to buy a house with that down payment and no debt and proof of adequate income, you’ll manage. If you live without debt you don’t need a credit score, any more than you’d need a batting average if you don’t play baseball.
If you have a really bad credit score, you can be prevented from getting an entry-level job (like at the Dollar Store). That’s different from not having a credit score, though.
I have a question - does “annual credit report” mean i can get one once per calendar year, or does it mean a full year has to go by between requests?
Thank you!
Focussing on your credit score is a HUGE mistake, which this article only perpetuates. Consumers do not need to know their score, as they cannot use it for ANYTHING. Credit scores are used by lenders, not borrowers. Please stop giving attention to scoring, which is directly responsible for predatory sites (and annoying commercials).
What’s the alternative, you ask? Focus on credit BEHAVIOR. Pay your bills on time, live within your means, invest sensibly, and for most of us, work hard. If you’re paying attention to your credit score, you’re probably looking for shortcuts, which is anathema to GRS. The scoring rules may change every few years, but good behavior never will.
How would this article be different if it was about behavior, instead of a MEANINGLESS number? The author would have closed his credit accounts regardless because they weren’t right for him. He’d have an extra $30 in his pocket (assuming $15 each for two scores) and he’d be JUST AS HAPPY.
If you don’t get it by now, maybe you never will. Scores are for games. Your finances are not a game. Do the right thing regardless of the “score.” Stop keeping score.
@Adam (not Baker): Just out of curiousity, would you change the way you use credit cards if the 30 day grace period was reduced or eliminated? I’ve heard speculation that this could be a possibility.
@CB - If I had to pay ~17% interest from the day of purchase then I probably wouldn’t use the card as I do now, no. I wouldn’t want to pay that interest. If the reward was good, I’d pre-load my card for large purchases, say to get 2% cash back, though.
@tinyhands - agreed that paying bills on time, living within ones means, investing regularly and sensibly, etc. are all more important than a credit score. But to ignore it for the sake of ignoring it when the world at large uses the number to determine an increasingly diverse amount of things about you is pretty ridiculous in my opinion. Luckily, if one follows good credit behavior then a good credit score will follow.
@tinyhands
How is credit score meaningless if you plan on having a mortgage some day? My score has meaning because it prevented me from refinancing my car with an institution that would be more convenient for me to deal with. It will also matter when I take out a mortgage and will affect my finances by thousands of dollars, hopefully in the right direction.
Credit behavior is important obviously, as you stated. But it’s impractical to ignore a number that plays such a large role in most people’s lives (except those without any debt or mortgage).
Also, why criticize Baker for wanting to know his score? What if he’s curious? Isn’t that worth $30? What about the fact that he’s a personal finance blogger and his readers are likely curious about the affect of canceling their credit cards on their FICO score? He’s clearly not modifying his life because of the score, otherwise he never would’ve canceled the cards in the first place out of fear of his score dropping.
Not having a credit score is annoying.
Without a credit score, cell phone companies will not give you a normal contract. They require a large ($1000 or $500) deposit *and* put you on a handicapped plan that, for example, does not allow international roaming. I had to be a customer with T-mobile for a year and a half before I could get off the handicapped plan and turn on international roaming, which sucked, because I travel internationally a lot. (No, you cannot roam internationally on pay-as-you-go.)
Without a credit score, my utility company made me pay a $500 deposit. They paid it back (with $0.14 interest) after a year of being a customer.
Additionally, when you need to do something like this that requires a credit check and you don’t exist in the databases, the customer service people get all hushed and confused. I don’t know what shows up on their little screens, but it must be scary-looking.
It’s a thousand annoyances like these. I wish there were some way to say “look, I pay what bills I have and I have more money than I need, don’t make me jump through more idiotic hoops”. Apparently, however, the only way to do that is by having a credit card.
At some point I began to be reimbursed for much of my travel. This, combined with the above annoyances, are what pushed me to finally get a credit card. Hilariously, because of my lack of credit history, the limit on the card has been too low for the past three years to actually cover, say, several plane tickets, a week of hotel, and conference registration, so I end up fronting most of the money with a debit card instead.
“It’s a thousand annoyances like these. I wish there were some way to say ‘look, I pay what bills I have and I have more money than I need, don’t make me jump through more idiotic hoops’.”
They have invented a way, it is called a credit report and credit score. Businesses want to know that you have a long and proven history of paying money you owe to other businesses. They want to know that you are trustworthy of extending credit to. If people want to hide this information from them then they need to pay the price. Literally.
@doubters
How did knowing your credit score affect your behavior? Did you NOT apply for a car loan or mortgage because you knew your score ahead of time? No, you needed a car loan/mortgage, so you applied for one. If you knew that the outcome was going to be bad, would that mean that you no longer need a car loan/mortgage? Your knowledge of your score has no effect on the outcome, because the lending decision is not yours to make. Has anyone EVER been denied credit, walked back into the lender’s office, and successfully argued his case based on his prior knowledge of his score?
“But sir, you have to give me this loan because my score is 761.”
“Oh, I see. Nevermind my own process for determining risk. You know your score. Here’s your money.”
That, gentlemen, is ridiculous. Even if there was ONE true credit score, there is no law that says a lender must use that method for determining lending risk. Instead, lenders use a variety of means, including local/regional factors and their own lending portfolio’s tolerance to risk to determine whether or not to make a loan. And yet you claim to know the one number that’s going to make a difference and can somehow use this knowledge to your advantage?
I know that higher scores get better rates, and low scores will get poorer rates. I know certain behaviors that will increase or decrease my score. I know that simply waiting a year for my score to get into the next higher bracket could save me thousands upon thousands of dollars on a home loan.
It sounds like you are arguing against people being informed and using that knowledge to their advantage, which is ludicrous.
A credit score kept me from having to pay PMI (put down just over 18% on our $117,900 mortgage-first home). We were told that the lender was so impressed with our credit/payment history, the monthly fee was waived; Our realtor said he had never seen that before.
It also helped me get a 4.25%, 30-yr. mortgage.
Lots of other benefits as well. Still great to pay cash, though, whenever possible/sensible.
To those worried about the inability to get a mortgage due to lack of credit score, it’s not the insurmountable obstacle that some would have you believe.
In 2000, I bought my first house at the age of 27. I had no credit score to speak of, as I never had gone into debt. Yet I managed to get a 30 year fixed mortgage at 6.5%, which was about as good as it got at the time, without having to jump through a ton of hoops.
I had to provide proof of employment, and a record of paying my bills on time from four sources, but other than that, it was a relatively painless process. While it was 10 years ago, I heard the exact same arguments - “oh, you’ll never be able to qualify for a mortgage without a credit score”, etc.
It’s just not true.
As for the concern raised about hotel/car rentals and debit cards - I always use my debit card, and have *never* had an amount held over the actual cost of the service. If someone is encountering these issues, perhaps they should take their business elsewhere.
In 2000 the housing market was going up, up, up. You could be homeless, jobless, and a turtle and qualify for a home loan.
This is a classic example of “treating the symptom” instead of the “root cause”.
If a person who is financially disciplined must cancel their credit cards to stay financially disciplined, they aren’t really financially disciplined. Instead of looking at why they can’t keep open credit accounts and not abuse them, the author has tried to remove the temptation.
Rather, if the author analyzed why they got into severe debt before (e.g., emotional spending, lack of budget discipline, etc.) and resolved that problem, they could simply keep the accounts open and 1) use them only in emergency or 2) use them responsibly.
In today’s world it makes sense to have at least one credit card for the reasons many have stated above. And ditto Megan’s comment (#24)…the real impact has probably not had time to hit the credit score yet.
Regardless, at the time I heard - word-for-word - the same arguments that I’m reading in this thread. They weren’t true then, and I’ll bet dollars to doughnuts that with some research and shopping around, it’s not true now either.
@Adam - You can know which behaviors are good and bad without knowing your number. If you are able to wait another year, that’s great. You determined that you didn’t need that loan right now. But if you needed that loan right now, how does knowing your score change that? How does YOUR KNOWLEDGE affect the rate a lender is willing to extend to you?
@Holly - You’re absolutely right that A credit score (emphasis mine) helped you out. But knowing A credit score and all the factors that went into your lenders decision to waive PMI on the missing 2% are two different things. It was not your prior knowledge of your credit score that got you a great deal. It was your behavior in creating such an excellent credit history. Congratulations.
I am definitely NOT arguing against people being informed. You need to know the difference between your needs and your wants, and how shifting the line between them may affect your future ability to satisfy either. I am against the idea that an arbitrary number determines whether or not you need something. If nobody else in the world is bound by that number, it is the textbook definition of arbitrary.
Unfortunately, we are becoming a country of lazy people. I don’t mean physically lazy but intellectually lazy. Many employers only want to hire people who graduated from specific universities or worked in specific companies (essentially delegating the screening process to those institutions). Now, many employers are looking at credit scores as another screening tool (it is 100% idiotic but it is happening). Therefore, to protect your future employment prospects and save money on insurance (home, car, disability, medical, travel etc etc) you should keep an eye on your credit reports (I would suggest an annual or semi-annual glance). Also make sure no one else is masquerading as you.
I wonder how long before dating sites have a credit score filter…
Lane.
You are right. I do home loans for a living. Right now in 2010. And you do not need a credit score. If you have one, we will use it.
But if you have no score (called “limited credit”) which is as I said before vastly different than bad credit there are alternate means of verifying creditworthiness.
And Adam…you dont need a credit score to get a home loan. Look. Not all caps. And still true.
I’d never cancel all mine- before I had a credit card I tried to rent a carpet cleaner and they wanted $1000 cash down. To rent a U-Haul we had to put $2500 down.
Now that I have one I use it for booking trips online. Reserving hotel rooms. I keep my card for that kind of thing- I’m responsible enough to not use it frivolously and I think that’s the most important thing. Just because I have it doesn’t mean I run up a balance on it.
I wish that we could cancel our credit cards. My husband and I have over $106,000 in credit card debt. It is very difficult to pay on our combined annual salaries of $45,000. We struggle each month and sometimes pay one credit card bill with another credit card. The banks have lost all sense of responsibility and they should be punished. We do not believe in filing for bankruptcy, but I believe the banks should lower the amount we owe so it can be paid. The banks got us into this mess!
Credit cards can be a useful too for some, but they are dangerous to most.
I travel a lot, only use a debit card, and haven’t encountered troublesome holds on my debit card in many years. I think that was a problem in the early days of debit cards, but has since been rectified. I know from my own business that when you place a hold, you need to use the same authorization number to “capture” those funds, or there will be two transactions, which is what messes people up. Putting the funds on hold shouldn’t trip anyone up, unless you’re trying to float the charges, which you shouldn’t be doing. You should have the money in your checking account to cover your plane ticket, car rental, whatever.
While not common, there are plenty of companies that will do old-school underwriting for mortgages and the like. If you apply for a mortgage or insurance or a job, and show documentation that you pay your bills on time and have a fat savings account, you’ll make you’re way in.
Look, if you have plenty of cash around, you can suffer the annoying $500 deposits and such without it crippling you. To me, it’s worth the little hassles to avoid dealing with these slimy sharks. Call it the principle of the matter. I resent being forced to do something I don’t care to do (access credit/carry debt) because someone tells me I must. No, thank you.
This will have to be my last reply today, as I do have a job that requires my attention, lest I am not able to pay my mortgage and ruin my credit HISTORY…
@Neel - I won’t argue your points about being lazy. I just think that’s offtopic and inflammatory. But I want to point out an important distinction in what you wrote. “Employers may use credit scores, so keep an eye on your credit reports.” YES! Monitoring your credit reports (all 3) is an important good behavior. You do not need to get your own credit score, because you don’t know exactly what your potential employer is going to do with it but you DO know that there are other factors involved. For example, a complete slob with no social skills but excellent credit is not guaranteed a job! Would bad credit stop you from applying for a job? OK, it might, but it shouldn’t if you’re otherwise a great candidate, getting your life back on track, and well-suited for the job.
More important, therefore, than knowing your score, is perpetuating the behaviors that lenders/employers desire.
My department went through a huge re-org about a year ago, and all our jobs disappeared. Everyone had a job waiting for them, but about half had to go into a part of the company that required a credit score above a certain number (I don’t know what the number is; I had no interest in that job at all.)
So many people failed the credit check, they moved people from their first-choice jobs to the area that required good credit, just because their credit checked out(except from me - my supervisor knew i’d quit if they put me in a job I didn’t like. Hooray financial freedom!) Several people who *wanted* the jobs that required good credit, couldn’t get them.
Now, that’s separate from just not having a credit history - I think about 95% of my coworkers have or had student loans, so everyone has some credit history. But the score is important for a lot of things.
While I don’t monitor my credit score regularly, I do monitor all three credit reports annually via annualcreditreport.com.
What you can do is order one credit report today from one of the bureaus (Experion), then from the second bureau in four months (Equifax), and finally, the third bureau in 8 months (TransUnion). I put a reminder in my Outlook calendar to re-order each one after 12 months.
Another number that is handy is 800-525-6285, which is Equifax’s automated Fraud Alert. If you lose your wallet or are concerned about a potential fraud (I recently had unsolicited credit card offers in my name mailed to a rental property that I own), you can call that number, and they will put a 90 day hold on your credit report, and notify the other two agencies.
these days, businesses can no longer afford as much risk as they used to. They need to assess risk at every possible point from equipment, to capital investments, to labor. How do you assess the risks associated with your labor force?
This is where credit scores come in. It may not be the best, but it’s simple, established, and paints a fairly decent picture. Nearly everyone in the US uses credit, so nearly everyone has some kind of credit history from which a risk assessment can be made. the method is consistent and uniform (if not opaque), so it is easy to use.
Example:
Given two workers who are equal in skill, Worker A always pays his bills on time, and worker B forgets to pay his bills 25% of the time, which worker is probably more dependable? which worker will more likely be asking for an advance from time to time?
My point is, your credit score should not be taken as a personal reflection of yourself (even if it is, in a way) but a way for someone else to assess the risk associated with doing business with you.
@Troy “And Adam…you dont need a credit score to get a home loan. Look. Not all caps. And still true.”
Thanks for not using caps
I never said it wasn’t true, but I really question whether the interest rate one would get on this home mortgage would be viable if you had no credit score, relative to someone with a 760+ score.
Confusingly, there are like 3 Adams posting here and the article is written by Adam Baker. I need a new handle.
One question? For whatever reason I am slightly more comfortable putting in my credit card number when ordering something online than I am with using my debit card number. I think because somewhere in my mind I think it’s “safer” in that if the online company turns out to be fraudulent, they don’t have access to my personal cash account. And in turn, the credit card company is much more interested in getting their own money back than my bank might be in getting mine back :).
Is this a myth that I’ve concocted in my head (entirely possible)? I realize it’s a little off topic, but it’s one reason I keep a credit card around.
@56 Hence why I use “Baker”
To the reader who suggested just cutting up your cards instead of taking the time to formally cancel them, thereby avoiding a possible black mark on their credit score. Not a bad idea and I have done that in the past as well.
Those good ole days are gone now….I’ve just been notified from CITIBANK that my Platinum Select Mastercard, which I have had for 17 years, is now going be charged at $60 per annum and the only way to avoid that is to acquire annual purchases of at least $2400, at which time they will refund the annual fee. The alternative they state is to Opt out and close the account.
Well, you know what I say to that? I will not be bullied into spending money so that CITIBANK can make add’l merchant fees each time I make a transaction. I have always used the card occasionally over the years to keep it active but always paid in full each month. They did not offer any cash back incentives, so I used other cards I have that do. I guess since they did not make any money off me in interest, they try the recoup with merchant fees.
Btw, I just applied for a mortgage loan and learned that my credit score is over 800. I don’t know how much it may fall, if any, by telling CITIBANK to shine on…but according to most of what’s been said here, I probably should not worry. CITIBANK can have their card back and I will have 60 bucks extra to put towards the down-payment. How’s that for getting rich slowly. Cheers everybody!
@37, SARAH.
I found out in January that you have to wait a whole year(365 days) to get your free reports. I checked mine for free in Feb. 2009, so I had to wait until the exact date in Feb. 2010. Which reminds me, I should check them for free! Not that I care that much, but I may need to refi out of an ARM in 4 years, so i guess I will keep my score up. I have no CC debt, but have left them open. I occasionally buy something online and use a credit card to pay. Having the balance freaks me out, even if it’s $20, so I pay it back within a day or two. I don’t like to go to work to pay for the past. I would rather work and save for the future and spend today what I have earned.
Paul @65 Citibank is just doing awful things to their cardholders and it is a sign of how weak they are: Same thing 16 years with them and they wanted to Jack my rate. Told them where to put it. Bank of America was more than happy to increase lines to take their business and keep a low rate.
With regard to employment, Credit Scores are mostly used to see irresponsible behaviors. We used it to a limited degree with roles that involved finance and accounting. We looked for things like bankruptcies and large writeoffs. The one thing we never assigned any value to were medical expenses being late. We never actually looked at a credit score, just the underlying issues if there were any. And this was used only for people that worked in the flow of money.
Once you have a mortgage that you pay on time, the value of both your credit score and your credit cards contribution to them is pretty limited. At current rates, the likelihood of refinancing is extremely limited and with the market likely to be in the tank for years (check out today’s new home sales numbers…ouch!), most will just sit tight.
I think a bit too much is being made out of the credit card / no credit card issue. Do what you are comfortable with. Lots of people use credit cards with no issues but many people like Lupe in #55 end up in serious trouble. Know thyself.
@Lupe #55 Did the banks really get you into this? Are they really responsible or could it possibly be that you made some bad decisions and they were more than happy to fulfill what you wanted?
I’d love to hear the story because I think it beats any other credit card story I have ever heard.
@Troy, #53
Could you give some examples of the alternative means available that you use? I had no idea this was actually an option.
Thanks!
I first encountered the idea of living your life without credit in Ramsey’s TMM. I railed against the idea; it was analogous to having intellectual convulsions. However, once I gave some serious thought to the proposition, I realized it’s possible. We only have one credit card with what I would assume is an average limit ($4K), over 95% of the balance just sits there because we pay just the minimum payment or a little over until we have a couple of hundred dollars purchasing power and we spend it quickly and mindlessly. The harsh, cold, and unforgiving reality is that we live without credit now, what we live with is servicing that debt. DH and I are now on the road to becoming more fiscally mature, so we will probably get an AMEX card that obligates you to pay everything off in thirty days and retain a credit card for travel and online purchases, I agree with the sentiments express by poster #37.
I forgot about car loans. I didn’t realize credit score affected insurance rates. I don’t see why that would be, but thanks for the info!
I agree w. #27.
Adam (Baker) - interesting you should post this - I was wondering about this recently. I wouldn’t ever cancel every single card (I have 2 right now), but I was curious as to how bad it would be if I cancelled one of them.
Good to know!
Please people, be more willing to confront the tyranny of FICO. It’s a sham (private mysterious algorithm) to perpetuate the scourge of over-consumption. I applaud Adam for his courage to take a beating as he pursues the high-road. Many of us are not that strong. Importantly, the more of us who refuse to play this immoral game, the less hold FICO will have on the functioning of our financial culture. FICO is one of the biggest evils of our society today and DEMANDS our consternation. Don’t call me bitter; my score is 820. Better, call me a hypocrite.
@Lupe Contreras. Please, file for bankruptcy. Bankruptcy is a part of our debt laws for exactly your situation. The credit card companies take into account the risk from bankruptcies. No one will be upset and you will feel a burden lifted off your shoulders. Please file for bankruptcy. That is the way the system works. Don’t feel sorry for the credit card companies, they don’t feel sorry for you.
My fiancee is a bankruptcy attorney and she routinely sees people come in who should have come in many years ago. It breaks my heart to see people struggling for so long when the solution is right there. And whatever you do, do NOT withdraw retirement funds (IRAs, etc) to pay down debt. Under bankruptcy laws, retirement funds are protected (cannot be taken away from you).
Please file for bankruptcy. Even knowing just the numbers of your debt and your income, my heart is crushed.
Tinyhands (#51),
Knowing your credit score can keep you from being manipulated by the salesmen.
I knew my husband’s credit score when we were buying a used car in 2008, but they assumed we didn’t and offered a 6.9% interest loan. I literally said, “Our credit score is 785 and I’ll get a much better rate at our bank. Thanks for your time.” They immediately lowered the offered rate to 4.1% (which was lower than I got preapproved for from our bank the day before).
That’s how knowing your credit score can help. Knowledge is power. Period.
@Lupe (#55)
How did the banks cause you to be in $106,000 in credit card debt? Did they force a purchase on you?
I agree that the interest rates are ridiculous, but no one forces anyone to carry a balance.
I’m in total agreement with #73. The fact that the FICO score can be used in such a prejudicial manner is absolutely outrageous. However, it’s par for the course in this nation, owned and run for the benefit of large corporations.
Not everyone who is thinking about living entirely without credit is just too irresponsible to pay off their cards. We have a couple that are open, but I’m too intimidated by the FICO bullies to close them. We haven’t paid interest in a couple of years. I’m working on letting that go. There are people who just think credit cards are blood-sucking monsters who are immoral and unethical. I’d put myself into that camp. I would never sign up for a rewards card. They pay those rewards by trapping the poor into a cycle of never ending debt. That’s what funds those rewards. Yes, the people who use the cards bear much of the blame, but not all of it. I don’t want anything to do with that scene.
Ms. Clear (#77)
Rewards are usually paid through the fees that merchants pay to accept credit cards…that’s why it costs a merchant more to accept a Discover card than Master Card. Discover has better rewards. The merchants take these fees into account when pricing their merchandise. I rather get the rewards I’m paying for than just wave goodbye.
Credit cards are not evil. They are a business. You don’t have to use them just like you aren’t forced to shop at specific stores. I like being able to see where my money went since cash seems to fly out of my wallet when I’m not looking…
I haven’t had a credit card since 1989. I owe no in the world a dime. I have letters (August 2009)from Experian, Trans Union, and Equifax that state they have no idea who I am.
It’s not nearly as cool as it sounds.
Like #42 said ‘when you need to do something like this that requires a credit check and you don’t exist in the databases, the customer service people get all hushed and confused. I don’t know what shows up on their little screens, but it must be scary-looking.’
Indeed-people do not know what to do when you are 40 something and have NO credit report.
@Lupe I cant believe that the banks are to blame for living beyond your means or that notion could even cross your mind.
@Manfred - I wish people wouldn’t encourage bankruptcy because I and others that pay our bills on time, and keep our credit card balances to less than about 1% of our annual income, get to pay for all of the bankruptcies filed by the people without any restraint.
I couldn’t even fathom having a credit card bill at 2.5 times my income, right now our bill is about 1.5% of what we make in a year and I’m about to have a heart attack
Why isn’t this considered a monopoly? FICO has a SECRET algorithm that NO ONE is allowed to know. Yet it is used by everyone out there (creditors) to judge our worthiness. How is this even close to fair?
Shouldn’t we be allowed, if we’re going to be judged, to know HOW we’re being judged? Yes, the graphs and charts at FICO are all pretty. But, someone needs to sue these people and make them show their real algorithm. How is this fair to ANY consumer to be judged in a black box?
This is a very interesting observation. I would expect your FICO score to tank more than 5-10 points if you cancel all your credit cards. I’ve been having a couple of cards for years and I never intend to cancel any of them - I just keep all of them active by putting at least one monthly subscription on every card.
Not sure what your financial plans will be in the future, but having no credit score is definitely a risky bet, unless if you really can’t control yourself when it comes to using credit card - then it might make sense.
Come to think of it I should go check my credit score soon, that’s a great reminder. Thanks Adam!
I would echo those who have said that you should focus on being responsible rather than a particular score. I work for a bank and we have our own scoring model we developed. We do not use FICO. This is much more common than people are aware. Is your score important? Yes. Is your particular *FICO* score important? No, not really. Be responsible, pay on time, you’ll be fine. Don’t try to cheat the system by figuring out exactly how FICO does their modeling.
Interesting posts here. Years ago, I used to work for a credit card company as a modeler - I developed models that were very similar to the FICO scoring model (although not exactly the same). A few thoughts:
- As you can guess, I personally believe it’s pretty important to maintain a good credit score. Doing so makes life a lot easier, in my opinion. As a lot of posters have noted, you certainly CAN get by without one, the same way you can go without owning a car - technically possible, and even advisable for some people, but not the solution for everybody.
- One poster commented a few times on the idea that you should focus on your own behavior, not the score that results from it (the “scores are for games” guy). This is true, and for the most part your score will work itself out and is just a reflection on how risky FICO believes it is to lend you money, based on collective experience with people with similar borrowing histories. BUT… one very serious issue is the quality of the data being shared about you. In this regard, you absolutely SHOULD make an effort to be sure that your score is accurate.
- An example of the last point is the basic premise of this article. Contrary to popular belief, it is not a bad thing to close a credit card. You do have to worry about utilization, but assuming you’re not maxed out on your other cards, it won’t hurt you. But banks report a “reason code” for why your card was closed, and if that isn’t accurate, it CAN hurt you. “Closed by lender” is very different in the scoring algorithms than “closed by borrower”, and the former will hurt you. As you can imagine, the banks are not terribly diligent about how they report former customers’ information, and often get this wrong. They also often cease to report closed accounts altogether, meaning that (like me) you might have what looks like a current account on your credit history, with a balance but no deliquencies, that you closed two years ago. FICO is presumably sophisticated enough to weed these out, but who really knows? You should make sure your info is as accurate as possible.
- Also, your credit history goes back to when you opened your FIRST account, not your oldest active account. So you shouldn’t keep an account open just to maintain the age of your credit history - that’s already there and won’t change.
I haven’t worked in that field in a long time, so for all I know the models might now be created by genetically engineering baboons on a secret research satellite or something… but the gist of what I learned there was to focus on your own good, responsible management of your money, while at the same time maintaining a healthy skepticism that will help you ensure that you receive the benefits to which you’re entitled by doing so.
Good luck to all, however you decide to manage your financial lives.
As I understand it, rather than cancelling them, you should break them out every few months or so, charge something minor and pay off the balance.
We have had our share of sorrows with credit cards and although we have not cancelled them we have paid them and shelved them away.
We are not planning to use them and we understand thst zero balance for a long time may be a negative score however we are not willing to travel the credit card debt again.
We have sizeable student loans and that is where our efforts are focused.
When we tried to get a car loan, I never had a credit card but my husband had one since he started college and had a credit score. Luckily, the salesman told us that not having a credit score wasn’t bad. So we were able to get a car loan under my name. I don’t think we paid an outrageous deposit for the car since we were paying half in cash in the first place.
My parents, on the other hand, wanted to go to Vegas and rent a car. The car rental would not let them rent without a credit card… They didn’t say anything to them about putting a large deposit down. They said that no credit card=no rental. Period. So they signed up for one. Mom pays in full every month, unless she forgets ccassionally. I have no idea what her score is at this point or if it even matters.
Banks did not put people in credit hell. People signed up for a loan and agreed to the terms and interest rates. The banks simply obliged.
I’m not sure cutting up a credit card would prevent useage. I mean, it might prevent useage from the owner but who is to say it prevents fraudulent activity? Cancelling the card/account is much safer than just cutting up the card. We have had fraudulent activity on our cards and were told that thieves now have computer generated numbers. Sometimes they get the right sequence and Bingo! Frauduent activity abounds. Lucky us….
My last comment is in regards to saying people who avoid credit cards in order to stay financially stable are irresponsible because it shows they can’t handle the aspects of using cards. My reply is: Know your limitations. A recovering alcoholic is not irresponsible if he avoids temptation. If anything, he is being responsible to himself by not putting himself in a position that may tempt him back into drinking. Same thing with credit cards. If you know that they are a problem, avoid them like all get-out and guess what? Problem avoided. I do that to my In-Laws on occassion…..
I moved to the UK from Europe in 2005. I asked my new bank, Lloyds TSB, for a credit card (mainly to book hotels online etc, I always pay everything at the end of the month). They answered they couldn’t give me one because I didn’t have a credit score in the UK (the cocnept doesn’t exist in my home country), and that building one can takes months, if not years. My income was very good btw, and i had no debts whatsoever.
The person in the bank explained she only knew of one trick to get a good credit score fast: take out a small personal loan at the bank of a coupe of 1000 GBP, and repay it within a year by monthly installments. This would show I’m a reliable person who pays back his loans, and would quickly give me a good credit score. She even wanted to assist me in setting this up (so that’s the same bank refusing me a credit card!). I obviously refused, and managed to find another solution for my credit card problem.
To VNG’s point about using a debit card to book hotels and rental cars……risky. You have no recourse should something go amiss using a debit card. Use a credit card to reserve and the debit to pay. Much safer.
Now, what I find interesting is not too many years ago the FICO score was hurt by having too many revolving charge accounts. (too many was never defined to me). I closed many of my store and speciality accounts because all took other forms such as MC, Visa, AX, etc. Lo and behold about that time the rules changed and now if you don’t have enough revolving credit it hurts you…….again, how much is enough?
I, like some of you, have put a credit freeze on my credit report. I get a strong feeling the credit bureaus don’t like it. They make it very difficult to get information on yourself. I don’t for one second believe it is totally because of security. I believe it is to frustrate the user enough to get us to lift it. Don’t they get paid everytime someone accesses our reports?
Like one writer here put it I believe that mostly this is a scam. I believe there is a need for some type of monitoring but I believe the current system is manipulated too much by outside forces and not based on unbias data.
The reason those of us with good credit histories don’t have the “sterling” score is because it isn’t in anybody’s best interest except ours. Hence I have little faith in the scoring system. I have little faith in something I ultimately can’t control and in anything that the rules can change at a whim. Especially those whims that seem to give credit card companies carte blanche over the consumer.
I believe there is a need and a service that credit cards serve and I’m all for free enterprise but not financial rape. If the Mafia did what the credit card companies have been allowed to do it would be called loan sharking.
Credit cards should be used with caution just like feeding a shark……be ever mindful and don’t take your eyes off them.
@Lisa “I’m not sure cutting up a credit card would prevent useage. I mean, it might prevent useage from the owner but who is to say it prevents fraudulent activity? Cancelling the card/account is much safer than just cutting up the card. We have had fraudulent activity on our cards and were told that thieves now have computer generated numbers. Sometimes they get the right sequence and Bingo! Frauduent activity abounds. Lucky us….”
Really? Credit card fraud on a cut up card? You think this is something to keep you awake at night? If you have cut up the card and are not using it, and suspicious activity happens on the card, they will likely call you to investigate. Even if they don’t, they will send you the bill and you will say “Hey, I don’t use this card” and call them, and they will remove the fraud charges and track down the theif and send you new cards (which you can then cut up).
Your logic on this point is pretty terrible, sorry to say.
As for your parents not being able to rent a car without a credit card, thank you for your example. That’s exactly what I said. There are times when not having a card is a huge hassle, like when you need to rent a car on vacation.
I agree with your point on responsibilty and usage. People who can’t help themselves shouldn’t be allowed near credit cards. They should probably also get help for their compulsions/addictions from a professional, or try growing up and acting responsibly. Its not the “evil” credit card company’s fault though, but their own sickness/weakness.
I’ve always read about canceling your credit cards and how that affects your score, what about if my credit card expires later this year? If I renew with a new card but same carrier (Citi) will that credit history continue? If that closes and I open a new one, will it be like starting all over?
The whole FICO system is an idiotic scam. The only way to have a good score is to be in debt!
“If you have cut up the card and are not using it, and suspicious activity happens on the card, they will likely call you to investigate. Even if they don’t, they will send you the bill and you will say “Hey, I don’t use this card” and call them, and they will remove the fraud charges and track down the theif and send you new cards (which you can then cut up).:
This process is not as simple as it may seem. For anyone who has been a legitimate victim of fraud (my wife included) it’s an absolute mess.
It’s a lengthy process to get it resolved and it requires you to hold onto all the paperwork for the next 10 years. Courtney’s credit has the fraud pop back on at least once every 12-18 months, which requires us to refax the documents to have it removed.
Unfortunately, this isn’t uncommon. It’s common knowledge in fraud circles that this stuff has a history of being rereported.
If the timing happens to be before you do use credit (for a house or car loan, etc…) fraudulent activity on an account could stall or completely screw up the loan. Stalling a loan could cause in rate hikes if the base changes and deadlines are missed.
In addition, many credit card companies now have fees in *inactivity*. You are also exposed to a ton more junk mail, including account changes, terms of service changes, and “new” offers.
Checking your credit reports for errors (I think it’s like 78% have errors) is also more complicated. You’re simply exposed on many more fronts.
Point being, a real case of fraud often requires hours of work, sometimes over multiple years. It sucks.
Lupe: Please share your story, I am interested to know how it is the banks fault that you owe 106,000.
I also agree with the commenter above - I don’t want to encourage anyone to file bankruptcy. I know people that have and its similar to a really overweight person getting surgery to remove the fat. It may be gone temporarily but if you don’t fix the root of the problem, it will all come back. You have to learn from your mistakes and filing bankruptcy doesn’t teach you anything.
Lupe, I’d be curious to know how your debt of $106,000 is the bank’s fault also.
Most of the comments here have not touched on my reasons for not using credit cards.
1)Credit card companies cannot be trusted. They’re lousy companies. Not “evil”- just bad at what they do.
2)The FICO score is an “I love debt” score. Want a good score? Borrow a lot of money and pay it back on time. Repeat.
I’ve lived without credit cards since 1998. I travel, rent cars, stay in hotels. Never had an issue with the debit card.
The “hassle” factor is not an effective argument in favor of- it’s an excuse to keep a crutch. In a society where identity theft is the fastest rising white-collar crime out there, holding a credit account is a financial risk… one that I’m not willing, nor do I need, to take.
One last thing- find a self-made millionaire.. ask him if he got there with “cashback” and “air miles” and other nonsense…betcha he says no.
I canceled a card that was used just for Wachovia overdraft protection. I fired Wachovia and moved to USAA. I no longer need the overdraft credit card, so I decided to cancel it yesterday.
I have a 790 now, I’ll update you if this changes.
I’m really shocked that so many “financially conservative” people advocate using a debit card in lieu of a credit card. Why would you risk people getting access to your true money?
Also, in response to “self-made millionaire” comment (#96)…I recall Ben Stein said that he does all his normal spending on cash back/rewards cards and pays them off every month. Here, I found the quote:
Mr. Stein does use credit cards out of convenience and pays off the balance each month. Here’s a transcript from Frontline’s special on credit cards:
NARRATOR: Stein says he charges thousands of dollars a month in business expenses on his credit cards.
BEN STEIN: I use all their good services, and they don’t make any money from me. I mean, none to speak of.
NARRATOR: The credit card companies do make a percentage on each transaction, but Stein is not their ideal customer because, like 55 million Americans, he pays his bills off every month and doesn’t pay any interest.
BEN STEIN: The credit card companies hate people like me, who pay off our bills every month. And I know that because I ran into a fellow I went to high school with on the street, and he told me he worked for a credit card company. And I told him about how much I use credit cards and how I pay them off every month, and he said, “Oh, we hate you. We hate you guys. We call you deadbeats.”
I’m in my 40s. Having lived this lifestyle back in the 90’s…when I was uninformed about credit, FICO, and the credit fairy coming to save my score (I love that commercial)and canceled all my credit cards…I can tell people definitively: YOU’LL BE SORRY 10 YEARS FROM NOW!
Credit history is not something you should treat lightly by canceling old, established credit lines. When those closed accounts age off your credit file 10 years from now, and you have the credit history of a 21 year old at best (or none at all = disaster), you’re gonna rue the day you made such a choice. You can’t rebuild/replace your hard-earned credit history easily. Credit and FICO, like it or not, are crucial tools in our society. Length of history counts for more in the real world than just its weighted FICO percentage…it can be used to establish your character in business. Treat your credit as a valuable asset, learn to manage debt, and reap the rewards.
For the record, whether a credit line is open/closed only matters in FICO with regard to utilization percentages. i.e….when you’re carrying revolving debt. It will not tank your score to close all your credit cards if you have no revolving debt. It hurts you…really, really hurts you…when those aged accounts fall off your credit file in 10 years. Think long term…building credit and reaping the rewards is a marathon, not a sprint. In the meantime, do read up on Fair Isaac’s website regarding FICO and how it’s calculated. Google is your friend for searching out information. There are misleading assumptions in the above article. Good luck to all of you.
@Metroknow. It is true, you have a lot more protection when you purchase with a credit card online or really anywhere than with a debit card. Although if you make a signature-based debit card purchase, you get many of the same protections that you do when using a credit card.