Ask Unclutterer: Credit card clutter

Reader April submitted the following to Ask Unclutterer:

My husband and I have one credit card that we allow ourselves to actively use. By actively I mean it is the one we use to buy airline tickets, etc. but we pay it off right away BUT we have several credit cards going way back to our time before we met….most of them don’t have balances but a few do. The balances are the result of the old game of moving balances around to get a great rate until we can pay them off. So there are NO new purchases on these cards at all ever, just balance transfers. So how long do I need to keep those statements? I have so much paper from these cards. What the heck do I keep and what can I shred?

I want to begin by laying out my financial principles before delving into specific answers to your questions. These are the fundamental guidelines I follow for uncluttered living:

  1. Do not carry consumer debt. The only debt you should ever consider acquiring is a home mortgage and student loans (and, I’m not really in favor of student loans). Everything else should be purchased outright, including automobiles. Live within your means and you will never have to worry about debt cluttering up your life.
  2. If you must, use a charge card, not a credit card. For conveniences like purchasing airline tickets and renting cars, you may want to have a charge card. Pay this balance in full every month. Never carry a balance for more than 30 days.
  3. Save as much as you spend. If you have a steady paycheck, set up with your human resources department to have your salary automatically deposited into three accounts each month. After taxes and your retirement savings are pulled out by your company, have 50 percent of your take-home earnings deposited into your checking account, 40 percent into an emergency savings account (to cover things like large medical expenses if you should ever suffer a severe illness or injury), and 10 percent into a savings account for big and/or fun future purchases (vacations, cars, etc.). If you don’t have automatic deposit with your company, make these three deposits yourself. Once your emergency savings account becomes more than $5,000, talk with a financial planner to see if this money should be moved to a better performing investment. When you have saved half a million in emergency savings (and I’m no where close to this amount yet), you may wish to consider adjusting these percentages.

As I just said, these are the guidelines I have chosen to follow. Living this way is the only way for me not to worry about money or financial issues. You may be able to live with car loans and consumer debt and not be distracted by worries about having enough to pay your bills or what you would do if you needed a large amount of money in an emergency. I can’t live that way, though. If I have debt, I think about it, and I don’t want that kind of clutter in my life.

Knowing this about my financial guidelines, I think the first thing I would do is cancel all of the credit cards that don’t carry any balances. You don’t need them. Having them active runs the risk that someone can steal them and incur thousands of dollars of debt in your name, fills your life with paper statement clutter, and is a spending temptation. (Cancel them on a schedule, per Vida’s advice in the comments, if you are worried about your credit score. Also see “How and when to cancel a credit card” on Get Rich Slowly.)

Your next priority should be to pay off all of your balances on your not-current cards. Dave Ramsey suggests paying off your smallest balance first so that you get a relatively immediate satisfaction. I recommend paying off your highest interest balance first since it is the card that is wasting the most money. Choose whatever system works best for you, but pay off the balances. Once the balances are gone, cancel the cards.

Pay off the balance on your “actively used” card, cancel the card, and open a charge card account with someone like American Express. This way, you won’t be tempted to carry a balance from month-to-month, but you can still accrue awards points for the charge card purchases you do make.

After you cancel the cards, keep your statement that acknowledges you canceled the card and closed the account with a zero balance. You have no need to keep any additional paperwork once you have this statement from the financial institution.

As for your charge card moving forward, when the statement arrives each month you need to reconcile it with your receipts. If all charges are correct, file the monthly statements in a folder in your filing cabinet and shred any receipts you don’t need for tax or legal reasons. When you receive your annual statement, reconcile your monthly statements with the yearly statement to make sure that everything is correct. Under the advisement of my accountant, I keep monthly statements for three years and annual statements for the life of the account. However, I know some accountants suggest keeping monthly statements for seven years and others say get rid of them after you receive and reconcile your annual statement. Talk to an accountant and follow the advice he/she gives you for compliance with your state’s laws and practices.

And, remember, this is what I would do. I am sure that our readership has significantly different opinions and suggestions, so definitely check out the comments. Also, you may wish to check out Regina Leeds’ book One Year to an Organized Financial Life and Dave Ramsey’s The Total Money Makeover for even more ideas.

Thank you, April, for submitting your question for our Ask Unclutterer column.

Do you have a question relating to organizing, cleaning, home and office projects, productivity, or any problems you think the Unclutterer team could help you solve? To submit your questions to Ask Unclutterer, go to our contact page and type your question in the content field. Please list the subject of your e-mail as “Ask Unclutterer.” If you feel comfortable sharing images of the spaces that trouble you, let us know about them. The more information we have about your specific issue, the better.

75 Comments for “Ask Unclutterer: Credit card clutter”

  1. posted by Maryann on

    A good credit score is also essential if you are intending to start your own business. My partner & I have had many doors opened to us that would have been otherwise closed if we has less than excellent credit. From bank lines of credit to required bonds to our office lease. Please reconsider your recommendations…

  2. posted by Jenny on

    @Jack I graduated college not quite 8 years ago, with no loans. While I did have some help, I decided not to go to the Ivy league school I got into, and went to a great state school instead and graduated with no debt. I worked full time, went to school in summers, and graduated in 3.5 years to save on tuition. It’s possible. I graduated at 21, was able to start saving right away, and my (now) husband and I were able to buy a nice house when I was 24 without overextending ourselves (in the middle of the housing bubble) because we could put a 30k down payment and have a low rate fixed mortgage. We’re not perfect. Sometimes we spend too much, and we need to start getting serious about retirement funding, but I’m now going to grad school part time (with no loans).

  3. posted by Louise on

    I read both uncluttering and personal finance websites, and tend to think those two interests always overlap. It is fascinating to me to see, through these comments, how much they may not!

    For me, personally, the two concepts are closely linked: uncluttering leads to a re-assessment of how much stuff I need, needing less stuff leads to buying less and getting rid of more, buying less leads to thinking harder about money and debt, wanting less debt completes the circle of buying less/having less/cluttering less.

    The statement that everything is too expensive, that no one can save if they live in city X or go to college Y or work in field Z is an indication of where the speaker stands in this cycle. Not good or bad, just where they are right now.

  4. posted by EmmBee on

    I don’t see the point in saving statements. I can understand keeping them if you run a business, claim itemized deductions, or have to prove purchases for a corporate expense account, but for me saving them is just clutter.

    All my accounts are paperless. I don’t have to worry about someone getting access to the account by stealing my mail. I get an e-mail reminder to check the online statement and to pay anything owed. As long as I’ve verified all the charges were authorized by me and pay it off, I don’t see why I would want to hang onto the statement. The card company has to keep them (though I’m not sure how long), so if I were really in need of one, I could probably get it from them.

    I will note it is important to make sure you authorized the charges. I’ve had a few where I had to call a company for a reversal of something I forgot they were going to automatically renew, like a magazine subscription I no longer wanted.

  5. posted by Rosa on

    Half a million is a little much for the emergency fund (for us, one year’s expenses is about $50K and that’s our emergency fund goal – we’ll be there in about 2 more years).

    But it’s not a ridiculous amount to save up overall. My mom is a public schoolteacher, not a rich person, and her retirement savings was double that, after a 40 year career.

  6. posted by Tracy on

    Some people have said they couldn’t have gone to college without loans. Yes, you could. Erin chose a less expensive college. Her choice– doesn’t have to be yours. She chose to take longer to graduate so she could work and earn tuition. Her choice– doesn’t have to be yours.

    Do I want my daughter to have a college education? Yes I do. Do I think I am obligated to pay for it? No I don’t. Will I help her as much as I can? Yes I will. But sorry, Harvard is not in our budget. Hubby and I both went to state universities and we’ve had great careers.

    Everyone has to make their own choices.

    In the meantime, we are teaching her that our family lives on cash, not credit. She understands that if you want something, you save up for it. Extra work never hurt anyone. If we teach her these things, it’s worth more than paying for her tuition.

  7. posted by TanyaZ on

    I just ran the numbers for our household, and depending on how you count, we save 33% to 37% of what we make after taxes, so 50% is definitely is not out of reach. We are not uber-savers, but we do save money for vacations, medical, car expenses in separate savings accounts, I just never considered them “savings” because they eventually are spent. By that token, I have a clothes/home savings account and a property tax savings account – those are not true savings and were not included in the percentages. So, depending on how you count (are Roth IRAs in our out?), 50% is not that riculous.

    Now, regarding half a million. In principle, I like that number. It would be nice to have by retirement for unexpected expenses and maybe some luxuries, like travel. Our current goal, however, is 100K of free cash in taxable (non-retirement) accounts. Once we get there, we can set our eyes on half a million.

    P.S. My parents could not pay for my education, but I will open a college savings account as soon as we have a child. My children will have it drilled from early childhood that they need to get scholarships to go to college. Ultimately, at 18 “kids” are no longer kids and smart enough to make their own financial decisions, so they will have to decide for themselves what they do.

  8. posted by Sandra on

    For anyone who has half a million or anywhere even close to put in savings, I’d suggest:
    1. Make sure you’re putting the maximum deductible amount into tax-deferred retirement plans so you can save a bundle in taxes.
    2. Make sure you don’t have more in one bank account than what the FDIC covers.
    3. You can probably be a LITTLE less cautious and put some money into stuff like CD’s that’s save but matures at different times and gives you a little more interest.
    4. You’re probably not giving enough to charity!

    Erin, you’re usually very sensible, but thinking it would make sense to put this much money in emergency savings is a little overconservative, perhaps.

  9. posted by Becca on

    1. What if I need to purchase a car, because I don’t have one or mine was totaled and I don’t have the luxury of having 5 years to save for a car? What if I need to get to work?

    2. Every job I’ve had since I graduated from university was due to the connections I made there. My career would not have been successful without those connections and jobs – guaranteed. I wouldn’t have been able to go to that school without taking out loans. Suggesting student loans are bad is impractical and quite frankly, classist. Without loans, a lot of smart kids are relegated to state schools and community colleges. Sure, in certain careers, that may be fine and the kids can overcome the difference in education, but that’s not true in all careers.

    3. All of these ideas in this blog are “nice” and make “sense” but they just don’t work for most people living in the real world with actual expenses. With the apartment market where I live, if I put 50% of my paycheck in savings, I could pay my rent and my utilities and then I’d starve for the month.

  10. posted by Dawn F. on

    Maybe our country’s government should follow some of this great advice and perhaps our economy would be much more stable!

    The average American doesn’t seem well-equipped at all to handle their finances (living an over-spending, under-saving mentality and teaching those lessons to their children) and neither does our government! Ugh.

    This was a great post and I enjoyed reading all of the comments. If people would use basic common sense I think their financial picture would look much healthier.

  11. posted by brokensaint on

    I *chose* a less expensive college because I didn’t want to take too many loans. As an 18-year old non-college graduate, I couldn’t make enough money to support myself and go to school – even at a community college.

    I have to say that it’s kind of irritating me that people are telling me I could have done differently and better without knowing the first thing about my situation. I had already settled on colleges from the ones I wanted to go to. I got scholarships. I worked. No, I still couldn’t have done it without loans.

    And yes, if I put 50% of my paycheck in savings, I would not be able to eat.

  12. posted by Philip in the UK on

    Another somewhat off-topic post (i.e. not to do with tidying up) but I think relevant in the context of many of the posts.

    Whilst I agree in principle with buying things with ‘owned income’ rather than by credit card, there is one major advantage – at least in the UK – of paying by credit card for some things. Under UK law the credit card provider is ‘jointly and severally liable’ for any purchases between about $150 and $45,000. This means that if your supplier goes bust or what you buy doesn’t work, or breaks down unreasonably, your card provider must pay up even if the supplier can’t or won’t. The same does NOT apply to debit cards.

    As I say, if this isn’t the case in the US then my apologies – please ignore. But if the same protection is available in the US then it is a very valuable benefit of a credit card. Just make sure you pay the balance off every month. Automatic Direct Debit works just fine!

  13. posted by Denise on

    I just purchased your book with my credit card, Erin, a debt I will handle with complete responsibility! Thank you.

  14. posted by Jay on

    A couple of thoughts:

    - A credit card is the same as a charge card if you pay the bill in full each month.

    - In an emergency, a credit card (with the credit feature) may be invaluable. During the recent DC snows, a tree fell in our street, and our power went out. We (my wife, 6 year old, 2 year old, and I) had no heat and had to go to a hotel. Our car got stuck in the snow, and the trip to the hotel 3 miles away took 3 hours. Since the county delayed plowing our street, we were unable to drive back into the neighborhood for a week. We paid for the hotel with a credit card.

  15. posted by Kelly on

    Our extremely varied income makes an inherently cluttered financial system that requires extreme organizational skills (that I haven’t mastered yet!) to plan a monthly budget. I’d love to hear from some others who have variable incomes each month and year…how do you decide how much and when to make savings deposits? I’ve found automatic ones hard because our account balances can dip really low at certain points, making them more worrisome (what if there’s not enough on the single day the auto draft is made?). But having to make the deposits myself unscheduled is also a lot of mind clutter and requires firm self-control.

    Because it is going to take us a long time to build savings on a pretty meager income that varies so much, we have found having a credit card to be freeing to our minds during several job changes (thank you, economy), coming out of school transitions, and seasonal challenges (I make the least income during the winter months when our bills are always highest – e.g., electric heat, missed days due to illness for part-time worker with no sick leave, doctor bills). We can always pay them off in the summer when income increases and the few dollars in interest I pay for 6 months is more than worth the peace of mind.

    Hopefully some day we’ll have bigger savings to serve this purpose, but we’re in the budding stages of our careers with a young family and we want to enjoy this precious time with our little ones rather than work it all away.

  16. posted by Praveen on

    What about zero percent loans? I have the cash, but I want to avail interest-free options on household items like appliances, electronics etc. I invest the cash elsewhere.

  17. posted by Christie on

    Erin, thank you for quoting Dave Ramsey! We are very close to being debt free (except for our mortgage) thanks to him. As soon as we are debt free, then all of that extra money will be going into savings/money market accounts for our 6-9months of emergency funds.

    @Praveen… zero percent is nice, until you loose your job, deplete those savings, and have to pay back interest on the loans because you didn’t pay it off within the time period. If you have the money, just pay for it. Think of the time you will save not having to think about paying it off by December 31st 2012!

    I recommend reading Dave Ramsey’s “The Total Money Makeover” or listening to his talk radio show. He gives great advice that makes a difference in your future, as well as your family’s future!

  18. posted by Alix on

    $500,000 in emergency expenses? Paying for a car outright? I’m all for saving/spending wisely, but you gotta be kidding me.

  19. posted by rhett on

    @praveen – also – a 0% loan means they’re charging you more up front to make up for the no interest part of the deal. offer cash – for less than they’re asking and pay for it all at once.

  20. posted by Praveen on

    @Rhett. This was an offer from Bestbuy. I was buying a W/D set and a few other appliances last year for our home. There was no separate cash-only offer from BestBuy, just the sticker price. I used the 5 grand to pay off part of my mortgage.

    @Christie, I have an auto-debit setup for 36 months (for $50/month) that gets deducted every month from my account. This is actually very interesting. I did lose my job last year. I had around 10 grand in my savings account of which we used almost 6Gs until I found a job. Had I bought the appliances by paying the full amount, I would have gone belly up sooner or would have ended up selling some of my stocks (which doubled since then).

    It’s all good under you know what you’re getting into and you don’t go overboard.

  21. Avatar of

    posted by Sheryl on

    @ Alix – “Paying for a car outright? I’m all for saving/spending wisely, but you gotta be kidding me.”

    Not kidding at all – We paid $4000.00 cash for a good, reliable older car (a 1999 Toyota Corolla) a couple of years ago for my husband, and it’s still running great, with no problems.

    Insurance is cheaper too, because we don’t have to carry full coverage, and it’s good on gas. I have a 2001 Toyoto Echo that’s also paid for and very good on gas.

    I think the problem is that with all of these leases, people have been led to think that they need a new car with all the bells and whistles every three years. We drive our cars until they die.

    I agree with everybody that recommended Dave Ramsey’s “The Total Money Makeover” – it’s not the message that we’re used to hearing about handling your personal finances (it’s not even a message that many people WANT to hear, based on some of the comments here), but it’s a message that can give you a lot of peace of mind if you’re willing to embrace and implement it.

    As I said in the very first comment, my husband’s been laid off most of the time since April of 2006, and if we had been in debt, it would have made things very difficult indeed. As it is, adjusting to living on an income that was cut by about 2/3′s hasn’t been as bad as you would think.

    We live simply, pay cash for everything, I cook at home, buy at thrift stores and don’t think we need to have “the latest and greatest” of everything. In the end, it’s a CHOICE – you CAN live, and live well, without consumer debt.

    @ Becca – “Suggesting student loans are bad is impractical and quite frankly, classist. Without loans, a lot of smart kids are relegated to state schools and community colleges. Sure, in certain careers, that may be fine and the kids can overcome the difference in education, but that’s not true in all careers.”

    Frankly, I think your comment is pretty classist.

    To imply that state schools or community colleges are “bottom of the barrel choices” for smart kids (meaning the only kids who willingly go there are “less than smart”??), or that you can’t get a good education at these schools, is just wrong-headed and somewhat offensive.

    Especially in this economy, IMO it’s just not a good idea for a young person to saddle themselves with 10′s of thousands of dollars in debt when they aren’t guaranteed a job when they graduate that would enable them to pay it off.

    Get whatever jobs you can (bag groceries, flip burgers…) pay-as-you-go at the local community college if you have to, take longer to get your degree, and be willing to live on less. It will be far better than starting your adult life by having to declare bankruptcy because you don’t have a job to pay off that loan.

    Or consider a line of work that doesn’t require a degree. Now THERE’s a thought, huh? ;-)

  22. Avatar of

    posted by Sheryl on

    “It will be far better than starting your adult life by having to declare bankruptcy because you don’t have a job to pay off that loan.”

    Maybe I should re-word that – It would be far better than starting your adult life by defaulting on a loan because you can’t find a job that will enable you to pay it off.

  23. Avatar of

    posted by Sheryl on

    Oh sorry…I already said that…

  24. Avatar of

    posted by Laetitia in Australia on

    Fortunately (for me) the Australian economy isn’t tanking the way the US one is. Part of this is because we have tighter banking regulations. I’m doing a Diploma of Accounting through the Aus equivalent of a “community college” so I was learning about this a year ago – very topical.

    Years ago we were applying for a mortgage and the one credit card we (I) had counted against us as it was deemed that I had the ability to rack up a big debt on a cc. From that I learnt NEVER accept an increase in your cc limit offered by the bank. For the record, I had never maxed out that card at any time.

    I no longer have the cc, which could make it interesting if I ever have to hire a car as the Australian hire car companies only take cc. This is so they can charge you extra for things such as the insurance if you damage the car or you don’t refill the petrol tank before you return it.

    As for emergency fund amounts, I’d recommend the equivalent of at least 3 months worth of expenses. Of course, you may want to aim for more or less depending on in what industry you work and the condition of your local economy. The idea is that you aim for an amount that, in the event of an unexpected job loss, will allow you to still pay your expenses until you can find another job.

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