There are many personal finance gurus who teach that you should cut up all your credit cards, close your credit card accounts, and live entirely on a cash-only basis.
Is this a lifestyle you should adopt?
Maybe… Maybe not.
It’s a personal decision for each individual, and it’s important to consider both the pros and cons of credit cards before making a decision.
Reasons to Eliminate Credit Cards from Your Life
There are several valid reasons to consider cutting up your credit cards and closing your accounts. They are definitely worth considering.
1) You’ll Spend Less
One of the main reasons cited for eliminating credit cards is the idea that many spend more when they have easy access to credit. If you have to use cash instead of swiping a piece of plastic when you buy something, this forces you to think a little more carefully about whether you really need to make the purchase. This can help you cut expenses in literally every area of your life.
2) High-Interest Rates
Interest rates for credit cards vary widely and can be as high as 36%. This makes it nearly impossible to pay down your balance if you can only make the minimum payment each month, essentially trapping you in a cycle of never-ending debt.
4) High Late Fees
High late fees are a real drag. Miss a payment, and you will be out $25 – $38. Ouch! Remember that one of the main rules of living cheap is not wasting money on bank fees.
5) Annual Fees
Having to pay an annual fee just to keep and use a credit card has somehow never seemed right to me. After all, card companies earn a percentage of each transaction you make. Isn’t that enough? While there are many credit cards that do not have annual fees, there are still plenty that has this requirement – especially the cards with the best rewards programs.
6) The Fraud Factor
Who has time to deal with credit card fraud? I certainly don’t. All it takes is just one person stealing your card information and using it to make a fraudulent purchase to give you a great big headache. Credit card companies usually do cover you if your card information is stolen and used for fraudulent purchases, but it’s still a big aggravation to have to deal with it when it happens.
Reasons to Keep and Use Credit Cards
There are always two sides to every coin and those who are in the “keep your credit cards” camp make some strong points.
1) They Are Convenient
The convenience of using credit cards is hard to ignore. Credit cards make buying things very easy. It means you never have to worry about not having enough cash on hand. Credit cards are now almost universally accepted just about everywhere you go. As long as you have a credit card, you’re in good shape.
2) They Help Build Your Credit Rating
As long as you make timely payments on your cards each month, the payments help to improve your credit rating. And having great credit these days is almost mandatory. A good credit rating is necessary to secure a home or auto loan or rent an apartment, and it’s now common for employers to run credit checks before making hiring decisions.
3) Automate Your Monthly Bills
With credit cards, you can sign up for automated billing for many of your monthly expenses to make sure you never miss a payment. You can have many expenses automatically charged to your credit cards including your cell phone, cable TV, utilities, and others. Automated billing makes life easier.
4) Insurance Coverage
Many credit cards now extend insurance coverage for rental cars at no extra cost. This allows you to save money on the expensive coverage the car rental companies offer when you sign on the dotted line and drive away.
5) Frequent Flyer Miles
One of the best perks of many credit cards is obtaining frequent flyer miles from purchases. There are some who even make a game out of it and charge their monthly mortgage payments, car payments, utilities, and just about everything else to their cards just to get the reward points – while paying off their cards in full each month. They then use these points to enjoy free airfare on their vacations each year.
6) Emergency Backup Funds
It’s nice to have a backup source of funds while traveling. It can be a real bummer to be on vacation or on a cruise somewhere, have an emergency of some kind, and find yourself short on cash. Having a credit card or two on hand while on vacation really helps to alleviate anxiety. While you should have at least $1,000 saved up in your savings account, having your credit card available can make life easier.
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How Many Credit Cards Should I Have?
The average American has 2.6 credit cards. However, more accurately, when you remove the 29% of Americans who don’t have a credit card at all, that figure generally rises to about 3.7.
It sounds like a lot, but it’s nothing compared to the Guinness World Record holder, Walter Cavanagh who has 1,497 credit cards. Who knows what he does with them all? Here’s the interesting thing, out of Walter’s 1,000+ credit cards, he only uses one. This begs to question, how many credit cards should you have?
It’s not an easy answer
For those who have found themselves knee-deep in debt, the answer to how many credit cards you should have is probably zero. However, for everyone else, the answer largely depends on a number of factors.
- Can owning multiple credit cards increase your credit score? Having more credit cards may help towards boosting your credit score. However, only if you pay them off every single month. In fact, people with the highest credit scores actually have an average of 10 credit cards. Multiple credit cards may also help you save on insurance rates and may even assist when applying for a job. Plus there are rewards that can increase with each offering.
- How do you spend your money? Understanding how you currently spend your money and how you want to spend your money should largely affect how many credit cards you have access to. If you’re not that great at paying things off in a timely manner, well then the fewer credit cards you have the better. It’s questionable whether you should have one at all. Some people also prefer to pay for small things in cash and larger expenses on the card. If this is the way you wish to do your finances, one card is probably sufficient.
- How do you want to manage your finances? If you prefer to keep things simple, having multiple credit cards can be tough to manage even with budgeting tools. Having only a couple of credit cards means there are fewer bills to go through each month and the fewer billing cycles you’ll have to keep track of. Remember, it’s highly unlikely that your credit card billing cycles will match up, so the more cards you have, the more you have to manage your money efficiently.
- Do you need or want one for emergencies? Ideally, you won’t need to rely on a credit card for emergencies, however, not everyone has an emergency fund set aside or enough money in their savings to cover urgent situations.
While there are opportunities to take out short-term loans or use money borrowing apps in this case, sometimes people would rather have access to one credit card that is only ever used in an emergency. Remember though, this card should be a low interest with no annual fee and a high credit limit.
Key to remember when deciding how many credit cards to have is this: you must be able to pay every credit card in full, on time. If not, don’t take out the card.
Step 1: Choosing what kind of card to apply for
Figuring out how many cards is too much is also about what kind of credit cards fill your wallet. Carrying multiple credit cards that serve different purposes may work for you.
Most credit cards will offer something in return for use, and many people will carry multiple cards around to ensure they’re getting the best bang for their buck, no matter where they shop. For example, some credit cards offer a percentage of cash back on groceries.
This means people will use that particular credit card when they shop at a grocery store. That is why a lot of department stores offer incentives for people to use credit cards in-store. So if you shop at a particular retailer more than others, the generous reward rates and exclusive offers may be best embraced here.
Step 2: Taking advantages of benefits
If you’re a frequent flyer, a credit card that offers rewards points for spending may be a good option to have. Many of these frequent flyer cards will also offer discounts or points at particular hotel chains.
The key though is not to get sucked into introductory offers and sign-up bonuses. If the long-term benefits don’t work for you, don’t be lured into signing up for a card. Sometimes the bonuses and offers are worth it, but only if you intend to use that card efficiently in the long run.
Another thing to keep in mind is making sure your choice of a card is accepted – If your primary credit cards are American Express or Discover, you may face a problem, as these cards aren’t automatically accepted everywhere.
How to Manage Multiple Cards
There are many benefits to having multiple credit cards, from improving your credit score to utilizing each card for the best rewards. However, the success in having multiple cards lies in your ability to manage them correctly. Know which card offers which rewards, keep track of when each bill is due and what your credit limit is on each one.
How to Correctly Cut up Your Credit Card
So do you want cut up your credit cards? Here is how to do it correctly:
- Use a pair of strong scissors. Using flimsy scissors can backfire and lead to injury if the blades slip and catch your finger(s).
- Take your scissors and cut across your card’s security chip (the square on the righthand side of your card when looking at the front).
- Cut directly through the card account numbers (straight across) before cutting up and down to ensure there are no more than one or two full numbers visible at all.
Should You Cut Up Your Credit Cards?
Whether you decide to keep using credit cards or do as the financial gurus recommend and cut them up is entirely up to you. It’s your call. Before you make a decision, it’s a good idea to do a personal assessment regarding your card use.
Do you tend to spend more when you use credit cards or are you frugal regardless of the method of payment? Do you carry a balance on one or more cards from month to month, or do you pay your cards in full each month? Do you travel a lot and like having the extra assurance of having a backup source of funds in case something happens?
These are just a few things you should consider before making a decision to either keep or cut up your credit cards.
At the end of the day credit cards aren’t necessarily bad. They are just financial tools, after all. It’s how you use them – or abuse them – that matters.