Do I Really Need All These Credit Cards?
“2.9% Introductory rate.” “Guaranteed approval.” “No Annual Fee.” “Limited time Offer on Pre-Approved Gold Card.” How many credit card offers have been delivered to your mailbox this year? How many have you said “yes” to?
Thirty years ago banks and stores issued credit cards to only those with excellent credit. Their philosophy was customers with excellent credit would be most likely to pay their accounts and least likely to default.
In the 80’s, credit card companies made a radical change in their thinking. Rather than extend credit to only their best customers, they began marketing their cards to everyone regardless of their credit history. People with poor or marginal credit histories (including bankruptcies) began receiving credit card offers in the mail. The card companies reasoned that whatever money they may lose from customers who failed to pay, they would more than make up in finance charges, late fees and over-the-limit fees from those customers who max out their cards and carry a continuous high balance.
They were correct on all counts. Issuing credit cards to customers with poor or marginal credit increased their risk. They lost money on those who defaulted and filed bankruptcy. But they made hundreds of millions of dollars in additional finance charges from customers who quickly ran their card to the limit and carried a running balance. It’s estimated that last year Americans paid approximately $65,000,000,000 ($65 billion!) in finance charges alone.
Statistics show that the average American household has 10 credit cards. All those VISA, MasterCard, American Express, department store cards, retail mail order cards, phone cards, and gas cards add up.
Is it really necessary to have a credit card from every store you frequent? Probably not. You typically spend more money when paying with a credit card instead of cash because swiping a plastic card doesn’t “feel” like you’re spending real money. The more credit cards you have, the more opportunities you have to “swipe”. More credit cards in your pocket also represents more “potential debt”, a fact that those who read your credit report will consider.
Even if you have a little or nothing charged on them, multiple “open accounts” can have a detrimental effect when a prospective lender reviews your credit report. These “open accounts” represent credit available to you and may prevent you from obtaining the financing you seek, especially on a major purchase like a home or car.
Since too many open accounts can give the appearance (or show the reality) that you are overextended, a wise approach is to “reduce and simplify”. Keep one all-purpose credit card. Pay off the balances of your remaining cards and cancel them. (For tips on how to do this, see “The Right Way to Cancel A Credit Card”).
By paying off and canceling your unnecessary credit cards, you will give a positive boost to your credit score. You’ll have fewer monthly statements to keep track of. Less is more when it comes to credit cards.
Oh, about those pre-approved credit card offers that fill your mailbox? It’s a good idea to shred them even if you haven’t opened them. “Identity theft” is a growing problem. Any credit card or loan offers you receive in the mail should be shredded to protect yourself.
The Right Way to Cancel a Credit Card
In 1995, credit card companies collectively offered Americans 2.7 billion opportunities to sign up for a credit card. About 1.4 percent of the offers were accepted. Getting a credit card is easy. Almost as easy as a walk to your mailbox. But how do you get rid of a credit card that you no longer want or need? Is there a right way to cancel a credit card?
Cutting up your plastic with a pair of scissors is a good start, but you’ll need to do a little more than slice and dice if you desire accuracy on your credit report.
First, call the credit card company. You can find their phone number on your statement or on the back of the card. Verify with their representative that you have a zero balance and notify them of your intent to cancel the card. Note: It’s not a good idea to cancel a credit card while there is a remaining balance. Pay it off first, then cancel.
If it were a perfect world you could hang up the phone, trusting that everything will be taken care of per your request. Yet since the majority of credit reports have significant errors on them, you’ll be wise to take the next step and send a written request of cancellation to the credit card company. In your letter, give the time and date of your phone call, and the name of the representative you spoke with. Include your name, address, and account number.
After at least 30 days from your request to cancel, obtain a copy of your credit report. Be sure the report says that your account was closed by you and not the creditor. A creditor closing an account reflects negatively on the former cardholder. If the credit report says the credit card company closed your account, you’ll need to start the process over again. Contact customer service again and include a copy of your original letter. A second credit report will also be necessary.
Remember, credit bureaus only know what lenders tell them. If you find an inaccuracy in your credit report, it is your responsibility to contact the creditor, ask them to fix it and to provide the credit bureaus with the corrected information.
Canceling credit cards is important if you are trying to make a major purchase. Carrying multiple cards with low to no balances signals to a lender “potential debt.” Even with no balances, how does a lender know that after the mortgage is approved that the consumer will not go out and max the cards out, endangering the mortgage in the process? A consumer with too many open accounts may be turned down for a loan or asked to pay a higher rate of interest than if they had fewer cards.
Remember, credit cards are not trading cards. Don’t try to collect them. In the world of credit, sometimes less is more.
I Have Perfect Credit…Right?
You’ve never been late with a payment to any of your creditors. Ever. Your payments are always on time. Even early. You must have perfect credit, right?
Not necessarily. If your perfectly timed payments are being made to ten different credit cards, chances are your credit isn’t perfect. It’s stretched too thin. While timely payments are admirable and always best, they aren’t the only criteria for “perfect credit”. An equal and perhaps more important factor is your “Debt to Income Ratio”. To calculate your debt to income ratio (DTI), simply divide your debt (excluding any home mortgage) by your income.
Example: A person with a $30,000 per year gross income with $15,000 of outstanding consumer debt (credit cards, car loans, personal loans, etc) has a 50% debt to income ratio (DTI). If you have a DTI over 45%, your lender will likely see you as “overextended” and will offer you higher interest rates when you apply for credit or a loan.
When you’ve completed the Debt Free program, you will have strengthened the two primary areas creditors consider when extending new credit: Timely payments and a low debt to income ratio. That puts you in the best possible position to obtain responsible credit in the future.