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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{ 3 comments… read them below or add one }

1 Miss T @ Prairie Eco-Thrifter March 9, 2011 at 3:26 pm

I say if you can’t pay them off every month then cut them up. It is way to tempting to use them otherwise. I myself fell into that trap as a new adult years back. It took me a while to recover. Now I just have a credit card to get rewards but they are always paid in full when the bill comes.

2 asdf@asdf.tld August 10, 2011 at 12:56 pm

on many fico related websites it says:

Don’t close the old cards that you’re not planning to use any longer. I know this may seem counter-intuitive, but there’s a fairly simple explanation. One of the most important factors in your FICO score is your balance to available credit ratio. Using all or most of your available credit can be a sign of looming financial stress. How does this ratio work? Let’s say you have $5,000 in available credit and are using $1,000, this is better than if you had $1,000 in available credit and are using $500. The ratio in the first case is only 20%, but the ratio in the second is 50%. Closing an unused credit card wipes away some of your available credit and causes this ratio to increase.

3 asdf@asdf.tld August 10, 2011 at 1:00 pm

I myself have 7 credit cards with zero balances on all of them, month after month, I never use them. That’s about $30,000 in credit.

I’m in the 800 club. (that means my credit scores are over 800 at all 3 bureaus)

One company decided to drop my credit from $8000, to $250. I knew that “bank” was struggling, because they’re trying to doctor their books by slashing available credit. Since they cut my available credit, I did cancel that card. I applies for another card, and was extended $8000 credit.

They are for emergencies only. I do use them all once a year. And that’s about it.

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