It is no longer news that Credit cards now have a bad name in the personal finance industry. Many personal finance coaches teach people to close out their credit cards because credit cards are synonymous with the vicious cycle of debt. Of a truth, some credit card companies could charge stifling interest rates topped off with an unhealthy dose of fees akin to loan sharking.
However, getting rid of all your credit cards won’t necessarily make your debt problem disappear overnight. In fact, you are likely to create more financial problems for yourself down the road if you make a rash decision to cut up your credit cards. Before you go ahead to throw away your credit cards, here are four things you need to do.
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1. Learn how to make and follow a budget properly
Budgeting is a smart tool for staying on top of your finances; yet, it’s a shame that many people don’t know how to budget properly, many of the folks who make the effort to create a budget also have trouble sticking with the budget. A budget ensures that you have enough money to pay off your bills and pay down your debt at a faster pace as well.
Without a budget, you won’t know if the available money will be enough to carry you through until the end of the month – if you run out of money before the month ends, you’ll be left cashless and broke. Since you are planning to stop using credit cards, you’ll also need to start setting money aside for emergency expenses because you’ll no longer have the safety net of a credit card.
2. Keep access to other types of credit open
Before you cancel your credit cards, you need to ensure that you have created pathways to access a diversified portfolio of credit solutions. Canceling your credit card would lower your credit utilization ratio and reduce your available credit. A reduction in your available credit can in turn reduce your credit score making it hard for you to access other essential type of credits such as mortgages and auto loans.
However, if you have access to other type of credit such as personal loans, student loans, and auto loans, you’ll have a FICO score based on how you manage those credit. In essence, even though canceling your credit card will reduce the temptation to spend money you don’t have, you’ll still need some other types of credit to keep your finances healthy.
3. Pay attention to your credit score
If you don’t have any open credit accounts of for the last two years, you’ll practically be without a credit score because your good credit history will age out of your credit report. Cancelling your credit cards can outright destroy your credit score. However, paying attention to your credit score can help you know when you should begin the process of rebuilding your credit.
4. A secured credit card might be perfect
Your credit score will most likely nosedive after you cancel your credit cards. However, you can protect your credit score from taking a hit by using a secured credit card – a secured credit card can also help you get started in repairing your credit if it takes a hit after you cancel your credit score. A secured credit card typically has a lower limit and the secured nature of the card ensures that you can’t get behind a payment. Hence, a secured credit card can technically help you bump up your credit score without actually taking on credit.