Life is complicated. Managing your credit cards shouldn't be.
It's not just because of the trouble people get into when they have too many cards to count. Quite simply, if you rarely or never carry any credit card debt, credit is one area of finances that should be effortless.
With 1.2 billion credit cards in circulation in the hands of 190 million Americans (more than 80% of U.S. households have one), credit has become anything but simple. The average card-carrying citizen has nearly eight cards crammed in a wallet, according to Cardweb.com. That's about six too many in my opinion.
I don't see a public movement toward credit card minimalism, either. The power of plastic is strong and getting stronger. Cardweb.com estimates that by 2006, 30% of personal consumption expenditures will be made on credit and debit cards. (Today, about 24% is.) Our borrowing might is gaining momentum: The average credit line has spiked to $3,500 from $1,800 in 1992. There's nearly $2 trillion in unused credit in our names awaiting temptation to strike. I don't know about you, but I feel like heading over to Zappos.com to do some damage! (Just kidding.)
Unlike cute black shoes, there is such a thing as too many credit cards. Lenders look at the spending money at your disposal to make big decisions about doing business with you. A large line of available credit (say, one equaling your annual salary) makes them justifiably apprehensive about letting you borrow more for a home, car, or any other kind of loan. You don't want anyone wondering if you're going to take their dough and hightail it to the islands without leaving a forwarding address.
So how do you transform a wallet full of plastic and a stack of monthly bills into a streamlined debt-paying machine? Simple: Dump the duds. Your goal should be to carry only one or two credit cards with balances paid in full every month. The bill comes, you scan the charges, grab that month's receipts (which are all in one place and uniformly folded, right?), pay the bill, and go on to more important things, like yelling at the kids to load the dishwasher.
Think you've got a handle on Mr. Mastercard and his five or six pals in your purse? Consider the benefits of paring down:
- Simplicity. Fewer cards are easier to track. In addition, you have a much better sense of your overall debt level when it's on one or two cards, rather than spread across a bunch of them.
- A better credit record. Credit cards help build a credit history. But too many can hurt it. You want to have at least one credit card to show your creditworthiness. If you're married, your spouse should have at least one card in his or her name only, for the same reason.
- Less temptation. The more cards you have, the easier it is to rationalize excessive spending. But, remember that your card's credit limits are not an indication of what you can afford to spend. Fewer cards with lower balances is your path to enlightenment (or at least peace of mind), grasshopper.
Know when to fold 'em
Before you dash off "Dear John" letters to your lenders, take a good look at what's in your wallet.
Commitment counts -- older accounts are a sign of a mature creditworthy adult in bankers' eyes. Lenders see long-held accounts as proof that you are the responsible citizen that we know you are. Fifteen percent of your credit score is based on how long you have been using credit. So, if it's the choice between parting ways with that dashing new sliver of plastic in your wallet or the faded alumni credit card you got when you still had hair, keep the latter.
Aside from letting you borrow money, what has your lender done for you lately? Cards that give you something back are a blessing. And they're also really, really common. Cardweb.com reports that about 40% of bank credit cards have rewards programs attached to them. Before you put the Bling-Bling Back Atcha MasterCharge back in your purse, ask yourself if you've really taken advantage of the goodies that come with membership, whether it's airline miles or a discount on diamond jewelry. If the card carries an annual fee (and less than 20% of cards do these days), at the very least you want to get back what you pay annually to use it. Cash back is always a nice option. Actual currency is still accepted at many retail establishments, from what I've heard.
When you're short on dough, interest rates should shoot to the top of your credit card comparison chart. (An adequate cash cushion is the ideal workaround for the see-sawing rate game.) When life hands you an emergency that you can't cover in one paycheck, a low-interest credit card can offer relief.
However, just because a card boasts a single-digit interest rate now doesn't mean it will do so indefinitely. So read those leaflets that come in your flyer, and call your lender if you plan to put a big purchase on an inactive card. Nothing's uglier than paying for a new transmission at a 23.9% interest rate.
If debt is a problem, you should keep accounts where you have a decent track record, meaning no (or few) bloopers (like late payments or overages), and a longstanding relationship. If the low-interest offers dry up, your room for negotiating a better deal are best with a lender that has fond long-term memories of your time together.
For those who are model chargers, the most important part of your card member agreement is the grace period. That's the amount of time you have between the billing cycle and when your payment is due. Pay off your balance before the due date and you're borrowing cash for free. In recent years lenders have been chiseling those free days down. For me, anything less than 20 days is unacceptable.
In addition to using the nuts and bolts of your credit card program, other factors may play a role in reviewing your lending relationships. Customer service is a biggie for some, and it's usually not an issue until something goes wrong. Frankly, I keep my Motley Fool cash-back card mostly for the summary of charges it sends to me every year. All of my spending is categorized, displayed in lovely pie charts, and laid out for me to revel in my excessiveness. I use it for all of my purchases -- for cash back and also to see how much gas I put in my car over the course of a year. Plus the occasional smile on the cashier's face when he sees the jester gives me goose bumps. Yeah, I'm a geek.
The sting of streamlining
Cutting back on your paperwork and plastic does carry a few risks. I've heard from folks who discovered fraudulent charges on forgotten accounts. That's why it's important to actually close your extraneous credit lines. Cutting up the card and calling it quits doesn't count. An unused card is still an active account (until expiration), so while you might not be getting a bill in the mail, the bank still counts you as a customer. If your number gets in the wrong hands, you might not notice until it's too late.
Reviewing your credit report once a year will go a long way toward spotting any unscrupulous activity. (I use TrueCredit for the five bucks off and the streamlined three-bureau report. Again, it's about minimizing paperwork.) It's the easiest way to make sure that some bad guy isn't having a blast on your bill.
The right way to close an account is to call the 800 number on your card statement and find your way to a live operator. Specify that you want the account closed -- and this is important -- "at the cardholder's request." It's a minor point, but it looks better on your credit report if the account was terminated by the user and not the lender.
Cutting off too many lines of credit at once can have a negative impact on your credit score. Again, the level of "acceptable credit" depends on your income. Too high and you're a risk. Too low, and your banker may wonder why you don't qualify for more. Still, with responsible credit usage (paying your bills on time, every time), any short-term blip will be history in no time.
If you are required by your employer to cover expenses and submit them for reimbursement, you might want to consider breaking the two-card rule and keep an additional line of credit open devoted solely to business expenses. It'll be easier to track your charges and help streamline paperwork when the expense report is due.
Again, it comes down to finding the most manageable number of cards for your needs. Surely, two or three credit cards is adequate. Any more and you risk letting a pound of plastic muddle more important money issues.
The only cards in Dayana Yochim's wallet are her bank, car, and health insurance cards, and The Motley Fool Visa. She's still developing a system for folding her credit card receipts in a uniform matter.