Have you shunned your credit cards once and for all? You’re not alone. Maybe you had a bad experience. If you’re dealing with a lot of high interest debt, it’s easy to blame credit cards. It can be tempting to finally pay off your outstanding balances, cut up your credit cards and be done with them once and for all. While you may have good intentions when you aim to live a credit card free lifestyle, it can come back to haunt you later on.
Here are some reasons why you may not want to get rid of your credit cards completely.
Earning rewards has never been easier
Perhaps the best part of credit cards are the rewards. Every time you swipe, tap or insert your credit card, you earn rewards. This is a lot better than cash. With cash, you don’t earn any extra rewards by paying with it. Personally, I think carrying around cash is kind of a hassle.
Using a credit card for everyday purchases makes a lot of sense, as long as you use it responsibly. As we’ve said many times before, no credit card rewards in the world are worth it when you’re paying 20 percent interest just to earn one or two percent in rewards. But if you use your credit card wisely and never carry a balance, that’s when the rewards outweigh the cost (zilch in this instance).
Building your credit score
Unless you can afford to pay for a house or car in cash, building and maintain a good credit score is crucial. Once you pay down your credit cards, it can be tempting to cut them up and be done with them. However, by doing that, you’re hurting, not helping, your credit score. Here’s why.
Credit utilization and length of credit history are two factors that Equifax and Transunion look at when calculating your credit score. When you cut up your credit card and close the account, not only do you have less available credit, you have a shorter length of credit history, too.
To illustrate this, let’s look at a simple example. Let’s say you have two credit cards. You owe $3,000 on credit card #1 and credit card #2 is fully paid up to date. Both credit cards have a $5,000 credit limit. If you cut up credit card #2, suddenly your credit utilization goes from 30 percent to 60 percent. Yikes! This will negatively impact your credit score, even though you probably thought you were helping it by lowering the amount of credit you have.
Likewise, if you have a credit card with a long history, the last thing you want to do is cut it up. If you don’t use it as much, at least make a purchase on it every couple months to make sure it remains active.
Consumer protection benefits
When you pay for something in cash, you’re provided with very little consumer protection. However, when you pay for something with your credit card, depending on the card, you’re usually given a lot more protection. You may get everything from an extended warrantee to travel cancellation insurance at no extra cost. You can also dispute purchases, something that’s a lot harder with cash, when your money is usually as good as gone.
The Bottom Line
It’s best to avoid a situation where you feel like cutting up your credit card is the only choice. By using your credit card responsibly and creating a budget, you’re more likely to not find yourself in a tough situation like this. If you do, remember that by cutting up your credit cards, you may be doing more harm than good in the long-run.
