Category Archives: Credit Cards



Is it Okay to Throw Away Old Credit Cards?

A reader recently asked: Will it hurt my credit score if I throw away old credit cards that I no longer use?

To answer this question, let’s look at what goes into your credit score.   According to CreditCards.com, there are 5 factors that go into calculating your FICO score:

1. Payment History – 35%

Have a long history of making payments on time.

2. How much you owe – 30%

Keep your credit card balances below 20% of your credit limits.

3. Length of Credit History – 15%

Keep credit cards and loan accounts open for a long time.  But, don’t just sit on them.  Give them some exercise…at least occasionally.

4. New Credit – 10%

Lot’s of new credit accounts opened recently is a red flag.

5. Good Credit Mix – 10%

A variety of different types of credit is key.  A mix of credit cards and loans.

Old credit cards that you don’t use any more aren’t really helping your score.  If you still use them occasionally, you might keep them around to give you a little boost with #3 and #5.  But otherwise, go ahead and cancel those ancient, abandoned credit cards, send them through the shredder, and feel good that you’ve decluttered your life just a little bit more.  Your credit score should be just fine.

Looking at what all goes into calculating your credit score, keeping that number lofty certainly seems like a delicate operation. You might start wondering: Do I really need to worry about maintaining a good credit score?

Sadly, in today’s world, the answer is yes.  Lenders, credit card companies, insurance companies, utilities, employers, landlords, and the US government all may rate you based on your credit score.  So, does this mean you have to run out and sign up for a couple car loans and stuff your pockets with as many credit card offers as you can find?  Nope.  Keeping a high credit score doesn’t mean you have to load up on debt.  In fact, you really don’t need to go into debt at all.  Mrs. Pennypacker and I have made a conscious decision to no longer buy things with debt.  We plan to just keep a couple of credit cards going and pay those balances off every month.  This will keep our payment history good, the amount we owe will stay low, and our credit history will only get longer.  We may lose a few points in the credit variety category, but that’s only a small component of the overall score.

 



A Stolen Credit Card Reminds me of Why I Use Credit Cards

Well, last week my credit card number was stolen.  Not the card, just the number.  I’m not sure how it was stolen.  It could have been one of those card skimmers either at a gas station, an ATM, or a restaurant.  I’m pretty sure it wasn’t from online purchases since I generally go through Amazon and they’re pretty good about security. I found out about the theft when American Express called me to ask if I had spent $1,000 at a 7-Eleven in Dallas.  Now in case you weren’t aware, Mrs. Pennypacker and I don’t even live in Texas.  It’s been a few years since we’ve even driven through Texas.  And I don’t think either of us have ever spent over $75 at a 7-Eleven (where we would normally just buy gas), let alone $1,000.  I told the AmEx rep that it definitely wasn’t me.  No problem.  They immediately cancelled my card and issued me a new one. Strangely, the woman on the phone asked if I wanted my new card to arrive in 4 days or 2 days.  She explained that either way it would be at no cost to me.  I’m not sure why someone would ever choose to wait an extra 2 days to get their new credit card, so I picked 2-day shipping.  When the card arrived, I activated it and shredded the old one.  I still have to remember to change some of our automatic bill payments that were linked to that card.  But, other than that, it’s not too much of a hassle. This incident is a great reminder of why it’s a good idea to use credit cards instead of debit cards.  If this theft had been our debit card number instead of our American Express number, our checking account would instantly be a $1,000 lighter.  Banks are supposed to cover fraudulent charges, but it makes things more difficult when the money is deducted right away from your bank account and you have to fight to get the money back in.  At least with a credit card, you have time to review your statement and dispute suspicious charges before you actually use any money from your checking account to pay the bill.  Credit cards just add an extra layer of protection between criminals and your money.



Credit Cards Are Great Tools, Provided You Use Them Responsibly

I think sometimes credit cards get a bad wrap.  But, I love them.  If you follow certain rules, credit cards can be great assets in your financial toolbox.

Here are some of the benefits:

  • Fraud protection.  If someone steals your card or makes unauthorized purchases, you’re not liable for those charges.
  • Consumer protection.  If you feel a company is ripping you off, either overcharging you or under-delivering on a product or service, credit card companies will often stand up for you.
  • Loss protection.  If you lose your card, the card company will cancel that card and issue you a new one at no cost to you.
  • Purchase protection.  Many cards will offer an extended warranty on purchases above and beyond what you might get from the manufacturer.
  • Cash back.  These days most card have cash back programs ranging from 1-5% on purchases.  Why not take advantage of the free cash?
  • Travel insurance.  Many companies offer this perk for free, provided you use their card to book your travel.
  • Safer than cash.  Obviously, If cash is lost or stolen, there’s no way to get that money back.

And the drawbacks:

  • Budgeting is more difficult.  You’re billing cycle usually won’t line up exactly with the end of the month.  So, a month’s worth of expenses may span over more than one credit card statement.
  • It’s easier to spend than cash.  If you give a person a dollar, you’re wallet actually becomes lighter.  You feel it more when you hand over physical bills or write a check.  A credit card can buy a burrito just as easily as it can buy a big screen television.  You may not realize how much pain your credit card has caused until the bill comes at the end of the month.

Rules for use:

  • Pay the balance off every month.  Credit card interest is very high.  It can range anywhere from 15 -25%.  But, if you pay the balance off every month, you’re interest rate is zero.
  • Avoid card that charge annual fees.  There are plenty of cards out there now that have no annual fees.  I have yet to find a card with features for which it is worth paying a fee.
  • You still have to stick to a budget.  Since credit card purchases aren’t deducted from your checking account until you pay the bill at the end of the month, it can be easy to stray from your budget.  Make sure you account for credit card spending as if it was coming out of your checking account.
  • If you’re a shopaholic, stick to cash.  Know yourself.  If you can’t control your spending or lack the discipline to keep tabs on what you charge, never get a single credit and cut up any you already have.
  • Avoid store credit cards.  Stores usually try to bribe you into applying for their credit cards by offering you 10% off on your purchases just for applying.  In the end, it’s just not worth the hassle of owning a card you can only use in one place.
  • Get a cash back card.  Don’t get a credit card that gives you airline miles or gifts from their own online store.  Nothing beats the flexibility of cash.  Save your cash back and buy whatever you want with it.