Tuesday, July 24, 2012

Why Getting Rid Of Your Credit Card Is A Bad Idea

If you've had problems with overspending or keeping up with payments in the past, you may be tempted to close your credit card. After all, when you use cash, your debit card or your checkbook, you aren't incurring any kind of interest fee. You're also not spending money that you don't have. So why keep a credit card if you have no need for it? The following are three reasons you should hold on to your card, even if you plan on using it less.

1. Protection Using your credit card over your debit card, checkbook or cash, offers protection that other forms of payment don't. This is because you are not yet spending money. Your credit card company will issue a statement to you. Once you agree with the items that have been billed, then you pay for them. This acts as a safe guard against fraud because you can see what has been bought using your card right away and you can challenge it immediately. There are laws in place that will help you protect against fraud when it comes to your debit card and checkbook, but it takes time to process such fraud charges. Using either of those forms of payment withdraws cash directly out of your account, so even though it was fraudulent, you are still temporarily losing money. This can affect other payments as well if you don't have enough funds in your account to cover them. When it comes down to it, using your credit card is the safest way to make a purchase.

2. Convenience You won't always have cash on hand or enough money in the bank to cover a purchase you want to make. You may think that this is a good thing; after all, you shouldn't be buying things if you don't have the money for them. But what if it's an emergency? Maybe you need to catch the quickest flight out of town to visit an ailing relative, or there are medical emergencies that you have to cover? A credit card is a lifesaver in such a situation. Not to mention there are some things you can't even do without a credit card, such as renting a car or booking a reservation at a hotel. The only way you can do these things without a credit card is by allowing them to put a hold of up to several hundred dollars on your bank account, which is the equivalent of temporarily taking it out. This can hurt if your account is low, of if you need the money to cover other payments and bills, since that money won't be accessible.

3. Credit Score Closing a credit card account may seem like an easy way to avoid getting into debt, thereby avoiding damage to your credit history, but it's not. First of all, whatever good credit you accrued using that credit card will simply disappear. Secondly, it can raise your credit utilization, which affects your score in a negative way. The credit utilization is the amount you owe towards your balance. The higher the amount of your balance you are using, the worse your score is. By closing a credit card account, you are taking away additional balance, which in effect raises your utilization percentage by a lot. Don't think that your credit history isn't important. If you ever want to take out a loan to buy a new car or a new home, you'll need to have a good credit score.

As you can see, it's just not worth it to close your credit card account. Doing so can actually do more harm than good. The best thing to do is use your credit card sparingly, and when you do, pay it off immediately. This kind of responsible use will not only help your credit score, it will help keep you out of debt while keeping the advantages of having a credit card.

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