Should you keep your credit cards or cut ‘em up?

by Kristina on March 8, 2011 · 3 comments

Some of us have the financial priority to pay off our credit card debt and get rid of our credit cards with high interest rates and annual fees.  We may have a plan to achieve our goal, but what happens to those credit cards when our goal is achieved and our credit card debt is paid off? We must decide if we should keep our credit cards or we should cut them up.

What is the purpose of your Credit Card?

We must determine the purpose of our credit card, this will help us determine if we should keep our credit cards or if we should cut them up.  Maybe you are using your credit card as an emergency fund.  If you don’t have an annual income that allows you to save money in your rainy day fund then credit cards are a good alternative.

However, unused credit cards can be harmful on your credit bureau.  If you don’t use a credit card but keep it open then it will still be reported to the credit bureau on a monthly basis.  This is harmful because it does not help establish a good credit history because there is nothing to report.  It is also harmful because if we apply for other types of credit such as a mortgage or a car loan, the company will see that this credit is still available to us.  Therefore, they will take it into consideration towards our debt ratio.

If you are keeping your credit card for emergency purposes I suggest that you still use it at least once a month to keep the credit card in good standing, and keep a good credit score.

Why do you have a Credit Card?

People often get a credit card to pay for a big purchase that they can’t afford such as furniture, appliances, a vacation, or a wedding.  If this is the case then we are using our credit card as a personal loan to finance one purchase, we continue to pay it down monthly until it is finally paid off in full.

This can be beneficial because even though the interest rate on a credit card may be a little bit higher than the interest rate on a personal loan, the benefits of using a credit card far outweigh those that come with a personal loan.  With credit card purchases we can earn frequent flyer miles for a future vacation, or we can earn rewards points to later redeem towards merchandise and gifts.

If we have other forms of debt such as student loans, a car loan, a mortgage, or a personal line of credit I suggest that we cut up our credit card after it has served its purpose.  Don’t forget to call your credit card company and cancel it first.  However, if this credit card is our only type of debt, I suggest that you keep it open and continue using it to maintain a good credit history.

Some people believe that having no credit creates a good credit score.  This is not true.  Open and unused credit cards can be harmful.  Having no credit history is almost as harmful as having a bad credit history…I said almost.  If our credit card has a purpose we should keep it, otherwise we should cancel it and cut it up.  Temptation may always be lingering for shopaholics.  If used properly, a credit card can be a DINKS best friend.

Photo by Eliazar

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