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Breaking free of credit cards

Kira Limer opts for cash over plastic as she buys a book at Barnes & Noble. The idea of cutting out credit cards is gaining more exposure at a time when Americans hold more than $850-billion in credit card debt, four times as much as in 1990.

Associated Press

Kira Limer opts for cash over plastic as she buys a book at Barnes & Noble. The idea of cutting out credit cards is gaining more exposure at a time when Americans hold more than $850-billion in credit card debt, four times as much as in 1990.

NEW YORK — Here's one way to dodge credit card debt and late fees: Don't carry any plastic.

"People look at me like I'm an anomaly. But guess what? It's a whole lot easier when you're not juggling debt," said Paige LeFevre, a 41-year-old Atlanta resident.

The idea of living without credit cards is being given more consideration at a time when Americans hold more than $850-billion in credit card debt, four times as much as in 1990.

Of course, credit cards offer significant benefits — convenience being just one of many — so be sure to weigh them carefully before rushing to close your accounts.

A key concern is the role credit cards play in building your credit and maintaining a credit history. Remember that building good credit is important if you're in the market for a mortgage or other type of loan. Prospective landlords or employers often run credit checks, too. So holding on to your credit cards — even if you don't use them often — may be in your best interest.

Credit cards also offer certain consumer protections; for instance, issuers will often refund charges for faulty products. Cards are also necessary to rent a car and, if managed properly, can reap financial perks through rewards programs.

LeFevre says her vow of plastic abstinence came after she ran up $40,000 in debt while remodeling her home two years ago. But as a homeowner with a steady job for six years, LeFevre wasn't overly concerned about her credit score. She says she hasn't checked her credit score in recent years, but figures it's better when she's not buried in debt.

"It's just too easy to use," said LeFevre, who works for a retirement investment advising company. She has since paid off her debt with a number of drastic measures, including trading in her a car for a cheaper model, getting a roommate and selling many of her belongings (camping gear, jewelry, bicycle).

For LeFevre and others, keeping plastic around simply leaves the door open for temptation. The reasons for credit card debt no doubt vary, however, and in many cases is the result of financial hardship.

According to the Consumer Federation of America, a nonprofit advocacy group, 58 percent of people with credit cards don't pay their balance in full every month. Those who carry a debt have an average balance of $17,103, according to the group.

So how can you cut back? One option is to simply leave your plastic at home for a few months at a time. A credit card needs to be used about once every six months for the credit line on the account to count toward your FICO score, said Barry Paperno, a spokesman for Fair Isaac Corp., the company that created the FICO credit score.

For Kira Limer, not using credit cards makes it easier to stick to her guiding financial principle: Don't spend money you don't have. It also makes it easier to keep a running tally in her head of how much she's got in the bank.

"I just like to know for sure I'm not spending beyond my means," said Limer, 25, a resource librarian at a New York architecture firm.

Credit score factors

Your FICO credit score is made up of five factors of varying importance. Here's how your credit card use (or lack thereof) can affect each of the components.

Payment history. This accounts for 35 percent of your FICO score. If you have any late payments, the score will take into account how late you were, how much was owed and how many late payments there were. If your overall report is strong, a few late payments shouldn't be a score killer.

Credit use. Thirty percent of your score is determined by your credit utilization ratio, which measures your outstanding balance against your available credit. Experts say it's best to use less than 30 percent of your available credit.

Length of credit history. This determines 15 percent of your score. So if you're closing credit cards, keep the card you've had the longest.

New credit. This makes up 10 percent of your score. And signing up for new credit cards doesn't always boost your score because you're adding to your line of credit. Instead, it can lower your score because you may appear to be a bigger risk.

Types of credit in use. This makes 10 percent of your score, and looks at whether you have a mix of different types of credit, such as installment loans or mortgages.

Source: Fair Isaac Corp.

Breaking free of credit cards 09/22/08 [Last modified: Wednesday, November 3, 2010 1:04pm]

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