Some chuck credit cards to reduce debt

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 there are significant benefits that come with credit cards -- 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.

Ms. 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, Ms. LeFevre wasn't 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 Ms. 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). She also axed her cable package, manicures and eating out. Now she keeps her spending in check by taking out $200 in cash every week for groceries and gas.

For Ms. 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 that carry a debt have an average balance of $17,103, according to the group.

It's no wonder Americans are easing up on credit card use. Last month, MasterCard Inc. and Visa Inc. reported credit card spending was growing at its most anemic pace ever.

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 only needs to be used about once every six months or so 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.

Actually, making small charges on your card once every few months may improve your score more than frequently running up big charges, said Mr. Paperno. That's because your credit utilization -- the percentage of your credit line that's in use -- makes up 30 percent of your score. So the smaller your outstanding balance in relation to your credit line, the better.

For the same reason, keep in mind that closing your credit cards could lower your score if you have outstanding debt. If you're still determined to rid yourself of plastic, try to whittle down your balance before doing so. Cancel one card at a time, and wait a few months in between each cancellation to lessen the impact on your 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.

"If I had a credit card, it would be more difficult to keep track. It could be a lot more trouble than it's worth," said Ms. Limer, a 25-year-old New York City resident.

Instead, she relies on a debit card for day-to-day expenses.

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

How credit card use impacts your FICO credit score

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.

Note that the weighted importance of the categories are averages. For some people -- such those who haven't been using credit for long -- certain categories may count more heavily.

--Payment History. This accounts for 35 percent of your FICO score. 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. So if you have outstanding debt and cancel a credit card, losing that line of credit will mean you're using up more of your credit -- which will lower your credit utilization and thus lower your score.

Experts say it's best to use less than 30 percent of your available credit. Generally speaking, the lower the percentage the better.

--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.

One alternative to closing your accounts is letting them sit. But you should check on them occasionally to make sure identity thieves aren't using them.

If you want to make sure your credit cards are counting toward your credit utilization ratio, you should use them at least once every six months or so. Otherwise, that account will show up as being inactive on your report and the credit line won't count toward your line of credit.

--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 up the final 10 percent of your score, and looks at whether you have a mix of different types of credit, such as installment loans or mortgages. It's good to have a history of revolving accounts -- such as credit cards -- so think twice before completely giving up your credit cards.

Source: Fair Isaac Corp.