Credit Card Question, Part 1

Q. I’ve finally learned my lesson when it comes to credit cards. After charging up four credit card accounts and spending four years paying them off, I don’t ever want to see my name on another credit card again. In fact, I want to cut all of them up and close all my accounts. However, my friend says that I should keep the accounts open and keep one card just in case of emergencies. Which one of us is right? And won’t a debit card work just as well?

A. Congratulations on paying off your credit card debt and being so determined never to get in that kind of position again. We are glad that you have found strategies that work well for you to help you manage your money.

However, your friend does have a good point about your credit cards, for a number of reasons.

*Your credit score and credit to debt ratio.
You credit score is in part determined by how much credit you are permitted by financial institutions. If you close all your accounts, you could be lowering your credit score. Therefore, now that your cards are paid off, keep the accounts open, but put the cards in a safe place where you will not be tempted to use them, except in the most dire emergency.

Keep one available with a low interest rate and possibly cash back points and only use if for essentials and items you could not readily pay for in cash, such as online shopping. The key for using a credit card is never to charge more in a month than you can pay off at the end of the month.

*Rewards cards
Some rewards are worth having, such as free airline miles for purchases, but only if you are a great traveller. Otherwise, go for the cash back. Just be aware that studies have recently shown that people who use rewards based cards tend to spend 4% more each time they use it than cards that do not carry such perks. So make your shopping list and stick to it.

Continued in part 2


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