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How many credit cards
Question: I have paid off all my credit cards, and am now looking to work on one car loan and then my student loans after that. I am trying to figure out what to do with these 4 credit card accounts now. Do I simply close them out? Do I keep them at a 0 balance but pay the yearly fees for the sake of an improved credit score? What do you recommend? Thank you, Ed, Key Largo, FL
Answer: I bet it feels good to get rid of your debts. It's terrific. I wouldn't clutter up your finances with multiple credit cards. I can't think of a good reason why anyone wants more than one. An exception to that rule is freelancers and other self-employed folks. It's a savvy move for them to have one card for personal use and the other for business expenses. It makes record keeping easier.
What's more, why pay a fee for something you don't need. Go through the cards and decide which offers the best features for the lowest cost. You should also take into account the length you've owned the card. The longer you've had it the bigger its impact on your credit score. Closing the remaining accounts will ding your credit score somewhat, but the effect is fairly limited and with good habits your score will bounce back. The only real issue is timing. If there is a major purchase in your immediate future, such as buying a home, leave your unused accounts alone until the deal is done. Then close them.
One last point: Do you really need a credit card? Or is a debit card enough? A debit card is an electronic checkbook and, with a debit card, you can't spend more than you have in your checking account. In an epic shift, consumers are now using debit cards more than credit cards. It's a wothwhile question to ask. I do need one, but a friend of mine decided he didn't.
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Chris Farrell Marketplace Money personal finance guru
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Comments (8)
June 29, 2009 1:21 PM PT
Good advice to a good question. I agree 100% that closing the credit card accounts will ding your credit score (a bit) but it will bounce back. You can keep one credit card open until you can save some money for an emergency fund, then cancel it or simply use one for reward points or other incentives. Great work getting out of debt!
June 29, 2009 5:58 PM PT
I would agree with your advice. I closed a couple of credit card accounts which had longstanding zero balances and which charged annual fees (like AmEx Optima). But the on-air financial talking head on NBC's Today show just a couple weeks ago advised keeping these accounts open just so your credit score would not take the hit. Regrettably, her audience is a lot larger than yours or NPR's.
Because of the practice of sequestering funds for some types of debit card transactions, I believe it is prudent to have at least one credit card in addition to a debit card.
Of course the whole credit-rating thing should be prosecuted under RICO.
June 29, 2009 7:54 PM PT
I don't understand the advice to switch from a credit card to a debit card. Unless someone is addicted to debt and needs the psychological push of 'I can only spend what I have', a credit card paid off each months seems to be superior to a debit card in almost every way. I don't need to keep large amounts of cash in a checking account in case of emergencies (I can charge now and transfer money from savings later), if my card is stolen the money isn't instantly missing from my account, and the overdraft fees for debit cards in the US are usurious. I see why banks like debit cards, but I don't see why most people would.
June 29, 2009 8:51 PM PT
I guess if you don't value your FICO score having one or no credit cards is okay. But you better enjoy paying more for insurance and mortgage products; not to mention the problems of renting a car with a debit card. Further, using a debit card risks your deposit accounts while using a credit card provides a buffer as well as chargeback and other rights.
June 29, 2009 10:53 PM PT
Dear Chris Farrell,
I am surprised you said "with a debit card, you can't spend more than you have in your checking account." If you attempt to spend more than you have in your account, and the bank accepts the draft and then charges you a hefty fee, lo and behold you have spent more money than was in your account.
But I agree. A good share of the population would be better off working on a cash basis (using debit cards, checks, and actual cash). The truth is, banks (and other financial institutions) make money by renting space in their strategically placed quicksand traps.
June 30, 2009 3:36 AM PT
"A debit card is an electronic checkbook and, with a debit card, you can't spend more than you have in your checking account."
Unfortunately, this is no longer the case. Some banks are now authorizing debit card purchases drafted against insufficient funds, then charging hefty overdraft fees for the "convenience" of not having the purchase declined.
See today's story on this very site:
Debit Card Overdraft Fees
Cash is King!
June 30, 2009 7:41 AM PT
Wow, Chris. I'm a big fan, but I think you really dropped the ball on this one. These days especially, there are plenty of reasons to carry more than one card. Haven't you heard of banks shutting down accounts out of the blue? Or the infamous American Express financial review, where they freeze your account with no warning? It's always good to have a backup.
And another reason to keep at least two around: Have a good rewards card for regular spending and another, with a lower APR than is normally available on rewards cards, to be used in emergencies or other occasions when a consumer might need to carry a balance for a little while.
Record keeping is certainly easier if a person only USES one card on a regular basis, but that doesn't require closing the other accounts.
Don't even get me started on debit cards. You're way off here, as others have pointed out. If it wouldn't require dealing with my awful bank, who I can't wait to dump, I would have had them swap out my debit card for a plain ol' ATM card long ago.
TheEconomiss
July 8, 2009 8:37 PM PT
I don't carry debt on a card but I would definitely never get rid of my cc simply because I shop online and there is no way I want to risk my debit card and the account attached getting compromised from a security standpoint. While your liability is limited with debit cards, I still prefer not to take the risk.