Will You Pay To Keep Up Your FICO Score?
Well, President Obama signed into law the CARD Act, reforming the Credit Card Industries practices. What he signed is amazing, but it still didn’t go far enough to corral some of the more abusive practices.
I’ve read about possible responses by the card issuers, and two of them in particular perturbed me and made me think about how many cards I have, even though I don’t carry balances. (Yeah… I’m a deadbeat according to the card companies.) What set me thinking was the probable return of Annual Fees. Please let me pay you $75 a year so you can abuse me!
The other possibility is that grace periods on purchases may disappear – interest accrues from day one.
Or there is the possibility that you will get to choose one or the other – annual fee or no grace period.
Loss of the grace period is easy to overcome – pay your card forward. In other words, estimate how much you spend on a card every month and send in enough money to carry a negative (credit) balance so that there is no “balance” that can accrue interest. This is what I will do if I get an option on the cards for no grace or no annual.
But enough on the side, and the point of the title…
Since the average person carries $8,000 in credit card debt in order to have the credit cards count favorably towards their FICO score, they need to utilize only 30% or less of the outstanding credit lines.
So you have to have at least $25,000 in open lines to stay at the 30% mark.
So you have say 5 cards each with a $5,000 limit. Along comes the annual fee at $75. That’s $375 a year for the “right to borrow money” (businesses often pay for this privilege for a “line of credit,” but its not a credit card, and they get a tax deduction for it). On $25,000 worth of limits that’s a “fee” of 1.5% annually, even if you never use any of it.
You are now paying to keep a good FICO Score. Is this extortion?
You don’t want to pay annual fees, so you decide to get rid of a couple of cards. Now your “utilization ratio” goes to hell and your FICO score plummets.
Your interest rates on the remaining cards now get jacked up because you’re now a “risky” customer – not to mention things like your car, medical, and homeowner’s insurance premiums, as well as making car and home loans more expensive. (IMO, insurance companies should be banned from using credit scores to decide premiums.)
So what are your options here?
Look at it as a “necessary evil,” pay the annual fees, and keep the cards active? (Pay me, or I’ll f**k you up.)
If you get an option for a no grace period instead of an annual fee, pay your account forward?
Pay down your outstanding balances and only cancel a card when it won’t bring your utilization ratio above 30%?
Go all Cash (which can hurt your FICO just as bad as using too much credit)?
Say “to hell with It” and move somewhere where they don’t use money?
Photo credit: stock.xchng.