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So, in the U.S., everyone seems to want to have a great credit score. But, if you are doing well financially, you probably won't have much debt. In fact, I don't really want to have a bunch of credit cards lying around simply so my credit score can be high. I'd rather be so well off (10-20 years from now) that I don't need any form of debt.

Assuming this is the case, I won't need any loans so my credit score won't negatively affect me there. But, my credit score (or variants of it) do affect some of my insurance rates. In particular, I know most companies use that for car insurance rates. I know the difference between an amazing score and no score can be about 30% in insurance rates.

Does any one have any experience with this? Can you ask insurance companies to consider you as the highest credit score because you are very well off financially but have chosen no debt?

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    Can you give a reference for credit score affecting insurance? – DJClayworth Mar 21 '12 at 16:57
  • What sort of reference do you want? It is definitely going on. They might call it an "insurance score" and they might calculate it themselves so that it is not exactly your credit score, but it is based on the same basic ideas. My car insurance uses it and they sent me a little pamphlet explaining all the various categories they use (without any detail to the actual algorithm). – Graphth Mar 21 '12 at 17:01
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    You can ask an insurance company to consider you on the basis of the highest credit rating that you ever had, but whether you will be able to persuade them to do so is a different matter. There are many people in this world who had a good credit rating once but don't have a good rating now. In this, as in many other cases, "What have you done for me lately?" is a mantra that is likely to be invoked. – Dilip Sarwate Mar 21 '12 at 18:13
  • Somebody must not like the two answers posted; both have been down-voted without comment. – Dilip Sarwate Mar 22 '12 at 10:41
  • Now I know why I was confused. It turns out it is illegal to use credit scores as a factor in car insurance rates here in Canada. – DJClayworth Apr 4 '12 at 13:35
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You don't need to have a bunch of credit cards lying around; just a couple is fine. Get a "rewards" card (without annual fee) that pays you back for use, and use it regularly to buy groceries, for example. Pay it off promptly each month, using the rewards, if you like, to reduce the amount you have to send in. Or you can use the rewards for other purchases; some merchants offer $25 worth of merchandise for $20 in rewards.

It used to be the case that you could negotiate a discount for paying cash rather than use a credit card, but that is a lot harder to do now, in many cases because credit-card company contracts with merchants prohibit this practice. Also, merchants often prefer credit cards rather than cash because money-handling is an issue (pay for an armored car to come pick up the day's receipts, or risk getting mugged on the way to the bank, possible burglaries if you leave the money overnight in the store, daily balancing of cash-register trays, etc.)

So, not being in debt and being rich enough to not need to be in debt are laudable goals, and you have my best wishes that you will reach them soon, but getting rid of all your credit cards as a part of not being in debt may be more trouble than it is worth. Keep a couple, pay them off promptly, and if you are concerned about being in debt, you can time your charges so that you are in debt at most 2 or 3 days each month.

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    Maybe put your credit card in a safe deposit box, take it out once a month to go grocery shopping and nowhere else, and put it back right away. Hopefully, you won't come back with $200 of groceries when you only need $100 worth, but if you do, maybe you can afford to splurge $100 once a month (cf. being rich enough). But if you really feel undisciplined when you have a credit card in your wallet and a smartphone in your hand to order anything you want to, then that is a different matter. – Dilip Sarwate Mar 21 '12 at 17:09
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    +1 both for original answer and comment. I do not subscribe to the "spend more" cause/effect of plastic, but I respect those who do. My answer? Charge gasoline. Pay in full every month. – JoeTaxpayer Mar 21 '12 at 17:18
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    "When you use a credit card, you spend more money. " - I completely disagree with that. I cannot understand why people keep repeating this statement, its false. True statement would be "When you don't have discipline, you spend more money when you have a credit card because its easier". But hey, if that's the case for you, you're not going to be wealthy, you're going to be bankrupt. If you cannot control your spendings, the hike in the insurance premium is the price to pay for your inability to constrain your own behavior. – littleadv Mar 21 '12 at 17:28
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    @Graphth You keep disagreeing with things that are true for me Well... The "for me" part was the one you left out from all the claims I'm disagreeing with. What's right or wrong for you - you know better. But when you're making a general claim, I assume you mean it to be true in general. – littleadv Mar 21 '12 at 20:13
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    @Graphth Your very first comment on here that started all of this says "When you use a credit card, you spend more money. When you use cash, you feel pain sensations in your brain. When you use credit cards, this largely goes away, so you are likely to spend more. The rewards you earn are lost by the fact that you spend more. I do not really want to use credit cards" The entire comment was directed at you which means you were telling everyone that reads your comment that they will spend more. This is the general statement that you should not be making. – Kellenjb Mar 21 '12 at 20:37
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The comments section to Dilip's reply is overflowing. First - the OP (Graphth) is correct in that credit scoring has become a game. A series of data points that predicts default probability, but of course, offers little chance to explain why you applied for 3 loans (all refinancing to save money on home or rentals) got new credit cards (to get better rewards) and have your average time with accounts drop like a rock (well, I canceled the old cards). The data doesn't dig that deep.

To discuss the "Spend More With Plastic?" phenomenon - I have no skin in the game, I don't sell credit card services. So if the answer is yes, you spend more with cards, I'll accept that. Here's my issue - The studies are all contrived. Give college students $10 cash and $10 gift cards and send them into the cafeteria. Cute, but it produces no meaningful data. I can tell you that when I give my 13yr old $20 cash, it gets spent very wisely. A $20 Starbucks card, and she's treating friends and family to lattes. No study needed, the result is immediate and obvious.

Any study worth looking at would first separate the population into two groups, those who pay in full each month and those who carry a balance. Then these two groups would need to be subdivided to study their behavior if they went all cash. Not a simply survey, and not cheap to get a study of the number of people you need for meaningful data. I've read quotes where The David claimed that card users spend 10% more than cash users. While I accept that Graphth's concern is valid, that he may spend more with cards than cash, there is no study (that I can find) which correlates to a percentage result as all studies appear to be contrived with small amounts to spend.

As far as playing the game goes - I can charge gas, my cable bill, and a few other things whose dollar amounts can't change regardless. (Unless you're convinced I'll gas up and go joy-riding)

Last - I'd love to see any link in the comments to a meaningful study. Quotes where conclusions are stated but no data or methodology don't add much to the discussion.

Edit - Do You Spend More with Cash or Credit? is an article by a fellow Personal Finance Blogger. His conclusion is subjective of course, but along the same path that I'm on with this analysis.

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    +1 for the whole post and also for the "charge gas, my cable bill, ..." comment. Unless one believes that having the cable bill/satellite TV bill go directly to credit card will lead to excessive pay-per-view usage, this is a relatively safe use. Some companies allow the account owner to set dollar limits on how much pay-per-view can be charged which is useful when children are involved, less so when the account owner is an impulse buyer and knows how to over-ride the set limit. – Dilip Sarwate Mar 21 '12 at 22:53
  • The fact that people behave differently with credit cards or other abstract forms of money is precisely why credit scoring is a popular way to assess risk. Use of credit is a great proxy for studying behavior subjectively. If you were a car insurer, would you want to give a premium rate to someone who treats credit card limits as cash in hand? In any case, people here seem to equate the credit card with consumer behavior, which is 100% backwards. – duffbeer703 Mar 22 '12 at 13:35
  • @duffbeer703 - Do we agree this is not an exact science? One can be cash rich, really rich, and for lack of having 'normal' history has a report that doesn't quite reflect their true risk? (And I might agree, the system can't take everything into account, this may very well be good as it gets.) – JoeTaxpayer Mar 22 '12 at 19:38
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Your credit score can be part of the algorithm for setting your rates for auto insurance. It is one of many factors including sex, age, zip code, driving record, type of car...

There are some states that are concerned about using credit scores, some sates have passed legislation regarding this issue

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You can't ask insurers to use a particular score -- they have a state-approved underwriting model that they must follow consistently. Insurance companies make money by not paying claims, and poor credit score (including limit access to credit) increases the probability that you will file a small claim.

Why? If you get into a minor accident (say $750 of damage) and have a $500 deductible, you are much less likely to file a claim to get $250 if you have access to a cash or credit lines to make the repairs yourself.

If you feel that you are going to be penalized for closing credit card accounts, the solution is simple -- don't close them.

Other than an event where you need to sever a relationship with a co-owner of an account (ie, you break up with your significant other, dissolve a business, etc) or avoid paying an annual fee, there is no advantage to you closing a revolving credit account, ever.

If you cannot control your spending, throw the card in the shredder. Eventually, the credit card company will close your account for inactivity, which affects your credit to a lesser degree. (The big exception is if you carry sufficient balances on other cards, your credit utilization ratio goes up materially.)

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