Tuesday, January 30, 2018
5 Reasons to Cut Your Credit Card….And 5 Reasons Not To
We have all thought about it. Many of us have even done it in an angry haze of post-shopping regret. The thought of cutting your credit cards makes me laugh a little. It reminds me of slamming the phone down after a heated conversation. It doesn’t accomplish much and is more symbolic than anything. With personal debt levels at all-time highs, the decision to not use credit has become more and more important. Many of my clients struggle with debt and it has become an essential part of overall financial planning. I will start this post off by saying I have 3 credit cards. Sounds irresponsible, but I will add none of them have a balance. I use them for different purposes and it helps my track those expenses, be it business, groceries and everyday life. For some that is not acceptable, as they would have trouble not maxing each of them out. In today’s post, I will give you 5 reasons to cut up your credit card, and 5 reasons not to. I think it all comes down to personal preference, but most importantly, personal habits.
Reasons to cut that demon card into little pieces
1) Insane interest rates
Interest rates for credit cards are borderline criminal. When you have rates hovering around 20%, there is something terribly wrong with this situation. Of course, this does not hurt you if you do not carry a balance, but if you do it is a big problem. If carrying a large balance every month is becoming the norm, chopping up the card might be your best bet.
2) Lack of discipline
Do you like the mall? Well if you do it might be best if you didn’t have a credit card with you when you go to one. If you can not leave a store empty handed you need to address that. You also should consider not having access to easy credit. Sales can be tempting. New products are always eye-catching. Being in a certain mood could add to it as the term “retail therapy” is quite disturbing to me. Understand yourself and how you react to certain situations. If you have very little discipline when it comes to spending, you should not be walking around town with a credit card. You don’t leave a bottle of bourbon at the house of an alcoholic right?
3) Annual fees
The annual fee for a credit card can be absurd. There is no logical explanation for anyone to have to pay an annual fee for using a credit card. Credit card companies charge you interest on the money you borrow, and they even charge the retailers a small percentage for the transactions you make. That means that even if you don’t carry a balance, the card company makes money just simply because you used the card. Why they feel the need to charge you an annual fee is beyond me. And no, it is not worth it because of the stupid air miles you receive. If you cannot pay off your card month to month, then air miles are the least of your worries. Do yourself a favor and find a no-fee card or cut up the one you have.
4) Online shopping
Online shopping has become a huge problem for shopaholics. You can go broke while in your underwear before you have even got out of bed in the morning. That is troubling on many levels. If you cannot avoid the temptation of shopping online, having a credit card might not be for you. It is far to easy to run up a huge bill online. You might have to deactivate your credit card as your computer may save that info for you at your favorite online store. While Amazon might be an amazing company, it also has contributed greatly to the debt levels of many in our country. Do the right thing and cut the card.
5) You have too many
I started this post off by saying I have 3 credit cards. Why would I have three? I like to segregate business spending, groceries, and personal spending. Having the three helps me track them better, but the key is I never carry a balance. If you have large balances on several credit cards, you need to cut some or all of them. You obviously have a discipline issue if that is the case, so getting rid of them is the best option. To be perfectly honest, most people can get away with having just one card, so having multiple cards is just redundant.
Reasons to not cut your credit cards
1) Credit Score
We have all heard that you need to have a credit card to maintain and grow your credit score. My main man Dave Ramsey states that you don’t need to maintain or grow your credit score as an indicator of financial health. That isn’t necessarily true. To borrow for things like a home you need a decent credit score. If you have never had a bill in your name, then you will not have any credit history. I know this from personal history as for 5 years I didn’t have any bills in my name. When it came time to put something in my name, I had to pay huge deposits because of my lack of credit history. Now I did get that money back eventually, but I shelled out nearly $1000 in deposits for 2 services. When borrowing, lenders look at 3 things: Income, debt-service ratio, and credit score. You must be good at all three to qualify. Having a credit card and putting a small amount on it monthly to keep it active should be something we are all capable of. Have the discipline to pay it off and you will be fine.
2) Develop good habits
As mentioned at the end of the last point, you should be able to own a credit card and not get into trouble with it. If you treat the card like it’s your money, you will be fine. If you cannot use your card wisely, chances are you will also spend every cent in your bank account as well. Owning a gun doesn’t mean you shoot everything that moves. Having a bar in your basement doesn’t mean you can get wasted every night. Paying off your credit card in full is a great habit that promotes other great habits like frugality, budgeting, and saving.
Sadly, there are some places where a credit card might be needed. Having one makes it easier to book a flight, book a hotel, rent a car or buy online from certain retailers. Again, do you have the discipline to pay off the balance when you use the card? For some people who have racked up a lot of debt, a little inconvenience is necessary to get them back on track. For others who spend responsibly, owning a credit card makes life much, much easier.
4) You do get perks
Let’s remember that discipline is the word of the day. Owning a credit card can give you some benefits. I get discounts on hotels, car rentals, shopping, along with the 1.5 air miles I receive for every dollar I spend. That’s pretty solid! Now all of that would not be worth it if I could not control my spending. At the same time, I like knowing that my good money habits are giving me rewards. Don’t forget that this is all rubbish if you pay a high annual fee. Pay it off in full, drop the annual fee, and get the rewards. Simple stuff.
5) It doesn’t solve the problem
Back when I was in my early 20’s, I had 3 credit cards as well. I eventually ended chopping those up. Well, to be honest, the credit card company chopped them for me because I was over balance consistently. When those cards were gone not much changed. I still spent more than I made, I just found other ways to get money. It was only after I made a mentality change that everything started to click. If you gave me 10 grand back in those days, it would be gone quick. Now I think about when I spend $10. Having the credit cards was irrelevant. Not having the discipline to pay my bills in full, spend wisely, budget and save for the future was my main issue. If you cannot control yourself when it comes to spending, cut the cards yes, but also analyze the bigger problem. The cards are just the physical manifestation of your bad habits and cutting them ultimately doesn’t solve the problem, even though it might be your best move.
I will be honest. I like my credit cards. I never have to carry too much cash, so I never feel out in the cold. I also have a dedicated time each week to pay them off in full. Think about your spending habits and how having a credit card contributes to that. If you cannot control yourself, getting rid of the card until you can, might be the best option. If you are like me, enjoy the rewards and keep on trucking.
Thanks for tuning in today as Loan Week continues at Budget Boss. Don’t forget to tune in tomorrow as we discuss bankruptcy and how it affects you. If you would like to talk about your spending habits, please do not hesitate to contact me at firstname.lastname@example.org. Have a great day Bosses!
“Winners embrace hard work. They love the discipline of it, the trade-off they’re making to win. Losers, on the other hand, see it as punishment. And that’s the difference.” – Lou Holtz
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