Should Debts Be Paid Off with Credit Card Cancellations? Understanding the Impact on Credit Cards and Financial Health

The Impact of Credit Card Cancellations on Your Credit Score

Joe Parsons [ ] is correct when suggesting that the issue isn't with the credit cards but rather with the credit card owner. If you face certain conditions, it is indeed wise to follow Dave Ramsey's advice and avoid using new credit cards altogether. For example, if you have a history of falling into debt, it might be prudent to discontinue using credit cards, at least until you regain financial stability.

However, if you cancel your credit cards, your credit score could experience a significant reduction. If your objective is to maintain a high credit score, it is crucial to keep your credit cards open and use at least three of them each month. Make sure that your balances do not exceed 30% of your limit.

One of the primary reasons people accumulate debt is the inclination to spend what they've not earned. Most of the time, what you spend on your credit cards might as well be something you should have either avoided purchasing entirely or paid for with cash instead of using credit. By removing these cards, you might limit your spending, but it also means you're less likely to build a positive credit history. Therefore, maintaining a balance is key.

Understanding Financial Guidance and Perceptions

Dave Ramsey, a well-known financial "guru," famously states, "Responsible use of credit cards does not exist." While this may be true for some individuals who have struggled financially, it is a sweeping generalization. For many, using credit cards responsibly can indeed play a role in financial health and can even help build a high credit score. It is crucial to recognize that not all financial advice is one-size-fits-all; the best approach depends on individual circumstances.

Your behavior, not the credit cards themselves, is what led to financial trouble. You have control over your actions, and shifting your mindset to see credit card spending as equivalent to cash spending can help. When you use a credit card, you’re essentially writing a check, just with a different payment timeline. This delayed payment often feels more casual, leading you to spend beyond your means.

To avoid revolving debt, you might need to condition yourself to use credit cards only for necessary expenses that you can cover with a simple check. For larger items, consider installment loans from banks or credit unions, which typically offer lower interest rates than credit cards. By doing so, you can make your purchases and avoid the high interest associated with revolving credit.

The Consequences of Closing Credit Cards

Following Dave Ramsey’s advice to close all revolving accounts might lead to a situation where you have no "active trade lines," which are open accounts contributing to your credit score. Without this data being reported to credit bureaus, your credit score might disappear entirely, making it just as detrimental as having poor credit.

A balanced strategy to maintain a high credit score is to keep at least three credit cards open and use them regularly for routine purchases, paying them off in full each month. This strategy helps you avoid interest and build your credit score. Requesting regular increases in your credit limit can further enhance your credit score without boosting your spending habits.

In conclusion, while it is advisable to pay off debts, simply canceling your credit cards may not be the best solution, especially if you wish to maintain a high credit score. Balancing responsible credit card use with clear financial habits can lead to a healthier financial landscape and a higher credit score. By changing your perspective on credit card spending, you can achieve better financial health and peace of mind.

You should also consider:

Using credit cards only for essential purchases. Opting for installment loans for larger purchases. Maintaining at least three credit cards for regular use. Avoiding balances exceeding 30% of your credit limit. Requesting regular credit limit increases.