What are the best credit cards for good credit? And how do you decide which ones, if any, to cancel?
For a Plastic 101 tutorial during the holiday season, Family Goes Strong talked with Mike Sullivan, chief education officer for the nonprofit credit-counseling agency Take Charge America. Excerpts:
When should you cancel a credit card despite the credit-score hit?
If you realize you can't stop your spending, then certainly you need to close them. For most of us, if you have any control at all, it's a better idea not to close it. Even if you have to destroy the card, leave the account open.
But just cutting up your plastic won't help if a store lets you insert your Social Security number into its machine instead of swiping your card, right? That was the reason why I said if you really can't control yourself, you probably should close the account. There's always going to be a temptation. Cutting up the card just makes it more difficult. For most of us, it's enough to cut up the card. For a lot of us, it's not an issue at all. I have a number of cards I don't use. I throw them in a drawer. I'm not going to close the old accounts, because I don't want the impact on my credit score.
Doesn't it seem counterintuitive to be punished, rather than rewarded, for eliminating credit cards?
It really comes down to those people who control our lives, the good people at FICO [originally called Fair, Isaac and Co., after its founders]. The FICO score has become a substitute for character in this country. You have to have a good FICO score, or you can't get a job or a credit card. FICO has decided what's important about credit. One of the things is the length of your credit history. Also, the score rewards you for having unused credit. So if you have $10,000 worth of credit, and you owe $5,000, that's 50 percent. That's very high, and your score probably isn't great. But if you decide to close one account, you now owe 100 percent of your available credit. That makes your score go down.
So is it better to just keep one or two major credit cards?
Every time you open an account, and you establish new credit, it has a negative effect o your credit score. You overcome that if you don't use it very much, and pretty soon, after you've had it for a year or two, it may actually help your credit score. Your utilization ratio is low, you're not opening new credit any more. After awhile, it can help you. But temporarily, it hurts you. As far as your credit score goes, there's really no limit on how many cards you should have or could have. That doesn't seem to be much of a factor in your FICO score.
What are the best credit cards for good credit?
Most people should have at least two credit cards and another form of debt, such as an auto loan or mortgage or something else being reported back to FICO. Having different types of credit helps. There is one caveat. If you have too much available credit, some mortgage lenders are concerned about that. If you have a million dollars in available credit, and your mortgage doesn't go well, how do we know you're not going to take cash advances on your available credit and move to Bermuda and default on your mortgage?
So a good rule of thumb is moderation in all things, including number of credit cards?
I would suggest a minimum of two. I don't know how many I have. I probably have 10 or 11 accounts, but I really only use two.
What about people who panic that they've overspent over the holidays?
The first thing you always do when you have a debt problem is stop charging. You come up with a plan for paying off your debt.
Should people transfer their balances?
It is possible to save money with balance transfers. Most people do not. There are a couple reasons for that. They usually transfer balances because they get an offer with a teaser rate, 0 percent or 1 percent for some time. The credit card companies know most of us are not going to pay off during that time. There's almost always a balance transfer fee, maybe 3, 4 or 5 percent. The balance transfer fee is often as much as someone would spend on interest during that teaser time. You've just given someone $500 to move your debt from one place to another, and you've usually got the same debt.
Should you let yourself be lured by incentives – like earning airline mileage for dollars spent?
It's all right to consider incentives as long as you're not paying for the card. Airline cards very often charge an annual fee. Airline points are frankly almost worthless nowadays. It's extremely difficult to get a free flight of any consequence. All those miles just sit there, they don't do you any good, and you're paying an annual fee to get the card. If you want to get a card that has cash-back features, and you're not paying an annual fee, that's fine.
What about stores that offer special deals or bonuses for buying with their cards?
That can work. Most people don't pay the card off at the end of the month, and they start paying finance fees. They start shopping at that store because they have a card for that store. For most of us, store cards are a bad idea. They all take Visa and Master card, Discover. Store cards are not usually a good idea.
Is that because you end up spending more money?
Right. You're going to carry more balances. As a very young man, the only card I had was JCPenney's. We ran out of diapers. I would buy them at JCPenney because I had the card. You can buy them at a discount store cheaper, but I had the Penney's card.
Should you ever get credit cards for students in your family?
I won't say, "Never." I did that for all three of my children when they went off to college. I had one child who only used it once or twice for emergencies, and one child who never used it. Then I had a son who thought if he had a date and didn't have any money, that was an emergency. I think it's based on the kid. If you think he's only going to use it in an emergency, it's OK. The first time the child violates that trust, you take it away. It ends when the kid is done with school. I have seen too many older people whose lives have been ruined because they pay their adult children's credit card bills. When the kids graduate from college, you say give me back that emergency card or you cancel it. You have to just know your kids.
What other credit card-related words of wisdom would you like to share?
The thing that hurts most consumers the most on credit card debt isn't even the interest. It's the fees. For example, when they get in trouble financially, they pay late. If you pay late, within 30 days, it doesn't even hurt your credit rating, but it costs you quite a bit of money. It can be $25 or more, depending on how your fees are determined. It can cost you a bunch of money. But people routinely do that. People spend a lot of money on late fees.
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