Should you cancel your credit cards?

cut up credit cards

 

When we paid off our credit card debt in 2012, we were elated. Paying off $70,000 was a major accomplishment for us. But we kept the cards.

What if there was a major emergency? How would we pay for it?

Then we got into the rewards trap. I loved my rewards card. We were paying it off every month and I was getting cash back. I used it for my business and felt like I was making money! We used the card more and more, justifying the use because we would get rewards. We put just about everything on the card and paid it off at the end of every month.

Until we didn’t. Almost one year to the day that we paid off our credit cards, we couldn’t pay the bill in full. I was crushed. We vowed to never get into credit card debt again but we did. After I paid as much as we could, there were only a few hundred dollars that we couldn’t pay off but it might as well have been $20,000.

That month we got back on a written budget after taking a year off. We stopped using the cards but we didn’t cancel them. In November 2013, I sent my husband a text message, “I’m canceling the card cards.” I thought he would object but he thought it was a good idea. He cancelled his cards as well.

It’s been five months and we have not regretted the decision. It has made our lives easier. No more mail from the credit card companies. No more special offers to tempt us to use the cards.

Some people think you must have a credit card, but I would argue that I can do anything with a debit card that you can do with a credit card. When we travel, we pay for the trip in advance, using a debit card. I can rent a car or a hotel room with a debit card. Yes, they will put a temporary hold on my account, but if I am so broke that I can’t afford the temporary hold, we shouldn’t be traveling. What if there is an emergency? That’s why we have an emergency fund.

We have switched our mindset. Our goal is to become payment free. Our goal is to pay for things with money we have saved. Cancelling our credit cards is probably one of the most important things we have done to work toward that goal.

When you think about canceling your credit cards, what comes to mind? What would you need to do to be comfortable without credit cards?

My little cash experiment

I’ll start by saying that I really want to go on vacation. A real vacation. Over the past twelve years, Jeff and I have gone on one real vacation. That was our wedding in Vegas. All of our other vacations have been local, a family visit or a few days for an event. I decided that this year, I would start saving for a major vacation. I want to take a cruise to Italy. I’ve always wanted to see Italy and I’ve been looking at the cruises that visit the country. It looks like a lovely idea and it’s a lot of money.

Since we are still paying down debt, I did not want to divert any of those funds for the trip. I needed to find a new way to cut back my spending to save for this. In January, I started using cash again. I’ve done this periodically through the years to help tame my spending but always went back to the debt card. This time, I put my debt card away (aka one of the cats stole it) and have been using cash for the past month.

Each time we get paid, I take out a certain amount for gas, groceries, eating out and other things we’ll need for the next two weeks. I based this amount on what we’ve been spending in the past using the debit card. I can only use the cash I have. Once it’s gone, I’m done spending. When I’m about to take out money for the next two weeks, I count up how much money I have left. I deduct that amount from what I take out of the bank, bringing my total back to the fixed amount I should start my two weeks with. The money I saved goes into my vacation account.

In the first month, I saved $97.00. I’ve got a few days left until we get paid again and I’ve still got about $60 left. I’m going to need a few things this week and gas but I’m hoping to still put $30 in the account. I always tend to spend more at the beginning of the month, since that’s when we make the big trip to the warehouse club to stock up on cat food, litter and other things we need for the month. The majority of the money I put in the savings account last month was from the 2nd half of the month. I would be thrilled to put $30 in for the first 2 weeks.

I know $100 doesn’t seem like a lot, but when your total biweekly allotment is $300, I cut my discretionary spending for a four week period my over 16%. Not too shabby. It’s funny when you are holding something in your hand and realize that this could be money for Italy. I’ve put a lot of things back in the past month.

Credit and debit card issuers state that the average person spends 8-10% more when using plastic. I can’t tell you how many times I’ve made a purchase and not even known how much I spent. I know I had the money to cover it, so who cares right?

I know that if I would have had my debit card on me, I would have purchased a new vacuum last month. Mine needs a ton of repairs and it would be more cost effective to get a new one. Instead, I bought an $8 broom and dust pan. I’ve got all hardwood floors and it actually takes me less time to sweep, plus the broom gets into all the crevices in the floor. Oh how we think about things when we’ve got greenbacks in the wallet and a cruise on the mind!

Help! The fees are coming, the fees are coming!

credit-cards

In 2009, the powers that be decided to save all of us from high interest rates on our credit cards. I can see that this was a noble effort to stop those greedy banks from taking advantage of consumers, but if the legislation was so important, why did Congress decide that the legislation should not take effect for a year?

The credit card companies know they are running out of time. The new law takes effect in April, so they are doing everything they can to raise your fees and interest rates before the deadline. You need to be prepared. There are going to be lots of little dirt tricks so be on the look out! Here are some of ways they’ll try to get ya.

1. Raising your interest rate.

Watch your mail for a letter from your credit card company stating they are changing the terms of your agreement. Along with the change in terms is a huge interest rate hike. If you read the blog, you know I hate credit cards. I’m doing my best to get out of debt ASAP. I got one of those letters last year. The letter stated that I could “opt out” of the changes. I called the credit card company and was informed that I could “opt out” but I wouldn’t be able to use my card anymore. OH NO! You mean I can’t use your crappy card to get further into debt at a ridiculously high interest rate? You mean if I opt out, I can keep my super low interest rate and pay you off faster so I can never use you again? I’ll take option 2 please.

2. Annual fees

Since the credit card companies will not be allowed to raise interest rates if you miss a payment or have a poor credit history, those who use their cards for the rewards points are going to pay. Watch your statements for new annual account fees. These fees could be as high as $150 a year. I’m not willing to pay $150 a year for a gym membership and you think I’m going to pay this for a credit card? Um…no.

3. Inactivity fees

This is a fun fee. If you don’t use your card or  if you don’t carry a balance on your card, therefore incurring interest charges, you could get whacked with a fee. Again, watch those statements and make sure you open every piece of mail you get from your credit card companies.

4. Statement fees

Some companies, including World Financial Network National Bank, which handles the credit cards for some of your favorite stores (Ann Taylor, Victoria Secret and others) is introducing a $1 statement fee if you elect to have your statement sent to you snail mail. You can avoid this fee by signing up for electronic statements. I’m sure if you opt for the electronic statements, they’ll wave the late payment fee because you missed the email. Yeah right.

Watch for these and other fees in the coming months. Make sure you read your statements carefully and watch your interest rate from month to month. January is a good time to review your credit cards and make sure you are getting the best deal possible.

Do not co-sign on a loan

Everyday, I read a number of blogs to see what other financial blogs are talking about. Mary at Debt-Proof Living wrote a post about the new Credit Card Act of 2009 and the effect it might have on you and your college-age kids. In order for college students to get a credit card, they will now need to show proof of income or have a co-signer. Many kids will be running to their parents to become that co-signer.

I have a very firm belief that you should not co-sign on a loan or give a loan to a family member or friend. You can give out money, but you should not expect the money to be repaid. The majority of loans between friends and family members do not get paid (roughly 80%). If you do not have the money to GIVE, do not loan or co-sign since you will most likely be stuck with the balance. If you’ve ever listened to Dave Ramsey, Suzi Orman or any other financial radio or television show, there are always calls from people who have lent money to friends, family or co-workers and have not been repaid. If you can GIVE that person the money, do so with the peace that you are GIVING him the money. If you get some back, you can be pleasantly surprised.

In the interest of full disclosure, I had to borrow money from a family member when I was going through chemo. It was the hardest thing I ever had to do. I have been making monthly payments on this loan and have it almost paid off. I am also a huge believer that you honor your debts.

If your child comes to you asking to co-sign on any type of loan (credit card, car loan, etc), use the opportunity to teach them about debt. Show them the cost of borrowing for an item rather than saving for it. Show them how much wealthy they can accumulate by living without debt and saving for your future. If we do not teach our children these lessons, who will?

Is the increase in personal savings temporary?

J.D. Roth over at Get Rich Slowly wrote an excellent post today about the fall and rise of personal savings. He cites a number of experts who believe that the increase in personal savings is just temporary. I am not an expert, but I did write my Master’s thesis on this topic. I respectfully disagree with those experts.

Where did we go wrong?

Back in the 1980’s all interest payments were deductible. Car loans, credit cards, student loans… you name it, you got to write it off. Our savings rate was pretty low and Congress, in its infinite wisdom decided that this could not go on forever. The Country was falling farther into debt. The 1986 Tax Act limited and eventually disallowed the deduction for most types of consumer debt, except mortgages. There were very generous limitations put in place on mortgage deductions. A homeowner could borrow up to $100,ooo on top of the original mortgage for things completely unrelated to the purchase or upkeep of the home and write off the interest.Members of Congress felt that these changes would discourage consumers from borrowing and increase savings rates.

As the value of homes rose in the 1990’s and the beginning of the new millennium, home equity loans and home equity lines of credit became all the rage. Consumers would rack up credit card and car loan debt then roll it into  their mortgage to get the tax deduction. Plus, home loans have been really inexpensive. Interest rates are still historically low. Consumers continued to spend as credit flowed freely. Did they cut up all those credit cards after paying off the balances? Of course not. Now, they had a shiny credit card with no balance.  Well, until the next statement came. Never fear, home equity is here! When the cards were maxed again, many consumers just refinanced again. It was a personal ATM machine.  Who needs savings when there are credit lines available to save the day?

Fast forward to 2008. Home prices start to decline. No more personal ATM machine. Lines of credit, including credit cards, start to dry up. Subconsciously, consumers started to become savers. Without the safety net provided by lines of credit and home equity, people turned back to personal savings. Most consumers realized that they could not keep spending more than they make.  They needed a real cushion. Cash in the bank.

I believe that as long as credit is more difficult to get, consumers will continue saving. They will think twice before getting a new car loan or another credit card. They will think twice before getting that big screen TV. Hopefully, we will return to the days of paying cash for things. Remember lay-a-way? It’s making a come back.

Are you saving more? Have you put off big purchases in order to save for them? Are you a little more leery about putting things on a credit card?

Watch out for changes to your credit card terms

Yesterday, I got a letter from Citibank outlining changes to my credit card terms. I just about had a heart attack. Citibank wanted to change my interest rate to the LIBOR average (a rate banks use to lend money to each other) plus 21.99%. The new minimum rate on the card would be 24.99%. That’s more than double my current rate!

Getting out of debt

So far, we’ve discussed budgeting and tightening our belts. Now, it’s time to work on getting out of debt. There are a ton of different theories for paying off your debt and which debts to tackle first. Some say pay the one with with highest interest rate; some say pay the one with the smallest monthly payment. I’m in the camp with Larry Burkett and Dave Ramsey: I like to see results. Therefore, I’m a huge fan of the snowball method. Here’s how it works:

Put away those credit cards

As I watched the House of Representatives pass the $850 billion Bail Out Bill today, I was sad, angry and, at the same time, felt renewed in my efforts to help people live within their means. What we need right now is not more credit, but less credit. We have become a nation that no longer saves for the things we need, but wants instant gratification. It is that instant gratification that has gotten us into this mess in the first place.