Cut up your credit cards? Not so fast…..

Chris Rocks is, in my mind, a rare bird.   Why?  Because he’s honest and has customers in mind first and he’s in the “credit repair” business.

He wrote the post below that I thought you would find worthwhile.  Especially in light of how important credit scores are to the mortgage business.

Enjoy!

Resist The Urge To Cut Up Your Credit Cards | Good Credit Living

Resist The Urge To Cut Up Your Credit Cards

by Chris on January 23, 2009

There’s a new movement brewing – an anti-credit card and cash-only movement.

On the surface it makes sense. Cut up your credit cards, only use cash, and never be a slave to consumer debt again. Avoid the interest costs, finance charges, and various fees and penalties for things you can’t afford to purchase otherwise. Take back control of your finances and never borrow to purchase consumer goods again.

Given our current economic climate – sounds like pretty good advice. And I think it is – with one MAJOR exception – follow this strategy and you will watch your credit scores drop. As your scores drop, you will pay a higher premium for your auto and homeowners insurance, higher interest rates for your car, school, and home loans, and may even limit your employment options.

While you may be improving one part of your financial life by using only cash – you’ll be harming other parts.

35 percent of your credit score is dependent on your payment history. If you stop using credit cards, a big chunk of that payment history will go dormant. Unused credit cards become unrated.

Another 10 percent of your credit score is dependent on your mix of credit.

The FICO scoring model will take a look at the “Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)” If you are not actively using your credit cards, it will appear that you do not have a strong mix of credit accounts.

Follow a cash-only strategy and you are putting 45 percent of your FICO score at risk.

With that said, and understanding that curbing a reliance on credit cards is important, I suggested a slightly different approach.

New Strategy

1. Pick 2-3 consumer credit cards that are with a major bank or financial institution (avoid the Capital One’s of the world). Preferably ones with a long and solid payment history with a high limit.
2. Use one credit card only for gas purchases. Pay the balance off in full every month to avoid paying interest.
3. Use one credit card only for groceries. Pay the balance off in full every month to avoid paying interest.
4. Use one credit card for a recurring monthly fixed bill like a cable bill. Again, pay the balance off in full every month to avoid paying interest.
5. Cut up all other cards

Are there exceptions? Certainly. There are times where renting a car or reserving a hotel room may be near impossible without a credit card. You may be able to save money by purchasing something online, however, do not want to risk using a debit card to make the purchase.

As long as you make it a priority to payoff your balance each month after receiving the bill, you’ll remain debt free but maintain the benefits that using a credit card has on your credit score.

A handful of disclaimers:

1. You want the card you choose to use to have a high enough limit so that the charges that occur throughout the month do not exceed 30 percent of the limit.
2. You do not want to payoff the balance prior to the statement date because you want the balance and activity to be reported monthly to the credit bureaus. It’s best to wait until you receive your statement before paying off the balance in full.
3. The number of credit cards you should keep active depends on your specific situation.
4. You do not want to close the other credit card accounts – simply do not use them. Closing them in the short-term will lower your credit scores in most cases. Exceptions would be in the case of divorce or identity theft.

If you need help improving your credit, drop me a line, I’d be happy to help!

Credit Repair, Credit Score, Chris Rocks, Good Credit Living

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