What to do with your credit cards

Tess Vigeland Nov 6, 2009
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A credit card is swiped through machine at a Chicago toy store. Tim Boyle / Getty Images

What to do with your credit cards

Tess Vigeland Nov 6, 2009
A credit card is swiped through machine at a Chicago toy store. Tim Boyle / Getty Images
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TEXT OF INTERVIEW

TESS VIGELAND: So you really didn’t think banks would just twiddle their thumbs until the new credit rules took effect next February, did you? No, they’ve used that time to the fullest. They’ve hiked interest rates, cut credit lines and imposed all kinds of new fees on cards.

So what can you do aside from cutting up all those cards and living on cash? Which isn’t a bad idea. Well, here with some answers is Ken Lin. He’s CEO of the Web site CreditKarma.com. Thanks for joining us.

Ken Lin: Thanks for having me.

Vigeland: What is the best advice to folks who are trying to navigate their credit cards, whether they want to cancel cards, get new ones. What should they be looking for over the next six months?

Lin: Generally speaking, definitely don’t cancel credit cards. Credit cards are a great way to build your credit history and your breadth of credit products. So you don’t want to cancel your cards. What you want to do is you want to really focus in on the two or three credit cards that have a low interest rate and no annual fees. And then what you want to do is you want to keep those credit cards active. So you want to buy a tank of gas or a buy some groceries with them once every couple of months. Because what credit card companies do is they look at people who are inactive and who are essentially costing them money. And in those situations, they might close those cards down. You don’t have to carry a balance or pay interest to keep them active; you just need to go and spend once a month or once every other month

Vigeland: When folks are debating whether to cancel their cards — I mean, you’ve basically just said that you shouldn’t be canceling your cards — but then you’re hanging onto cards that perhaps do have an annual fee or some other thing. How do you weigh whether to cancel that card or keep it around just because it’s going to affect your credit score if you don’t?

Lin: I think what you just mentioned is the one exception that I suggest. Which is, if you have a card that has an annual fee, then don’t keep it just for the sake of keeping your credit score high. Don’t pay to have a good credit score. Don’t pay interest if you don’t have to, don’t pay annual fees if you don’t have to.

But if you have a card that doesn’t have an annual fee, that has a decent credit limit and you know that you’re not tempted to spend on it needlessly, that’s a good thing for you credit score. Because it shows that you are responsible, it shows that you don’t go out and spend beyond your means. So in those scenarios, don’t close them down proactively.

Vigeland: Is it possible to find low interest, no fee cards anymore?

Lin: They’re becoming harder to find. But you know, if you have good credit, it’s still possible. You just have to be very diligent about looking for the right cards and when you’re looking for the right cards, it’s also really important to find that commiserate with your credit score.

I think a lot of consumers get into a lot of trouble when they apply for credit cards that are out their range. One, you’re going to get declined, but more importantly, you’re going to get a credit inquiry, which will lower your credit score, which is going to hurt you when you find the right card that you’re looking for. So it’s important to match your credit level with the credit card you’re applying for.

Vigeland: What about if you’re carrying a balance and you’re watching as credit card companies get ready to make these changes, what do you do?

Lin: Well, I think there are some credit card companies out there that will still try to do the right thing for the consumer. In some cases, your local bank or the bank that you do most of your checking and savings with, they may actually have promotional programs that will help you defer that balance or at least help you get a good rate on that particular balance. Banks are still trying to make money the old-fashioned way, by lending consumers money, and some of them will have promotional programs, they’re just fewer and far between. So I think consumers just have to do more research.

Vigeland: And that’s really only if you have a high credit score, isn’t it?

Lin: Yeah, and I think that’s a final mental thing that we need to really stress: Gone are the days of lax credit requirements. All of the offers and all the great rewards and benefits that we historically talk about and the convenience of credit cards, that’s going to become a luxury for the high credit market and for people on the margins, it’s going to be very difficult. Rates are going to go up and they’re going to have many fewer options.

Vigeland: Ken Lin is the founder and CEO of the Web site CreditKarma.com. Thanks so much for your help today.

Lin: Thank you.

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