A: Credit cards have become an integral part of our lives; they help build and maintain our credit ratings, and there are even things we can't do if we don't have a credit card. Debit cards that work with the credit card systems, e.g. VISA debit, can get us around some of the issues. There are prepaid credit card-like gift cards, but those also have limitations that true credit cards don't have. When it comes right down to it, credit cards offer us convenience and security, not to mention loyalty points or benefits, that most of us are all too happy to depend on.
However, if spending too freely becomes an issue, breaking up with your credit cards, even if only for a few months, might be a good idea. There are things to keep in mind when you want to wean yourself away from the plastic — protecting your credit rating, stopping yourself from using your cards, how to manage money and what to do with emergency expenses typically top the list.
When you have credit card debt and you take a break from using your cards, the debt unfortunately doesn't take a break with you. In fact, taking a break from the debt can make your situation a whole lot worse.
To preserve your credit rating, plan how best to afford at least the minimum payments for each of your debts. Start by outlining your budget (here's a guide for how to budget your money) so that you know if you can afford your payments or if you need to look at other options to deal with your debts.
When you're not actively using a credit card it can be easy to miss if someone uses it fraudulently. Just because you're not using your cards, you are still responsible for them. It should be a breeze to check your statements carefully each month because they will be short.
To keep up with your minimums, set up automatic payments through your online banking. In the past, you might have been used to squeaking a payment in just under the wire for the due date, but you can make a minimum payment at any time during the billing cycle. Set your payment up to coincide with your paycheques to make sure you don't run short of cash and/or miss it altogether.
If you have a credit card with a zero, or nearly zero, balance, go ahead and close the card once you pay it off if you don't need it anymore. Many people have store credit cards they no longer use, having only applied in-store to get a promotion. While it is true that closing a card can lower your credit score, it is a temporary reduction. Using the card and ending up maxing it out will lower your score much more significantly.
If you're not going to use your cards for a longer period of time, consider if it's worth switching from a card with an annual fee to one that doesn't charge any fees. Call your credit card company and see what they can suggest. At the same time, ask if they can offer you a lower annual interest rate. Switching credit card types within the same bank or company is easier than applying for new credit elsewhere. Even if you've faced some credit difficulties, don't be afraid to ask for their help to get your situation under control. Saving on credit card interest and fees is always a good idea.
Does a Balance Transfer Make Sense?
As you pay credit cards down, you might be tempted to lower the credit limit to reduce how much available credit you have to get into trouble with. Doing this is a Catch 22. If you still owe on your cards, you don't want the amount owing to suddenly be more than about 60 per cent of your credit limit. This will start to drop your credit score. However, your credit score is most important if you plan to borrow more money within the next two to three years, e.g. apply for a car loan or mortgage.
Whether or not to lower your credit limit ultimately depends on what you see yourself doing; if the goal is to pay cards down while you're swearing off spending with plastic, then lowering the limit might be a good way to keep yourself aligned with your goal. But if you simply want to get a better handle on your overall spending by switching to a cash diet before you move on to other goals, then leaving your limit where it's at might be the way to go. If you need help deciding, one of our non-profit credit counsellors can explain the pros and cons more fully to you, based on the specifics of your situation.
How Do I Know If I Need Help With My Debts?
Without a credit card in your wallet, or a payment system on your phone hooked to a credit card, you need to plan to have the money to pay for what you need and want. A budget is the most obvious way to do this, but if you're not ready to create a full budget for yourself, start with a mini spending plan.
Consider when you get paid, what your expenses are and how much money you need to have available throughout the month. Try to keep some money in reserve for expenses that don't happen regularly. If you have to, put cash into envelopes or jars, store them in a safe place, and only carry with you what you need that day. If you use your debit card, collect receipts and keep a running total of what you're spending and how much is left in your account.
Real emergencies do happen — your hot water tank springs a leak or there's steam coming out from under the hood of your car. A sale at your favourite store is unfortunately not a real emergency.
Make sure you set money aside to pay for emergencies that you would normally charge on a credit card. Don't be discouraged, however, if you do need to bail yourself out of a true emergency with your credit card. It takes time to build up enough savings to get yourself out of a pinch solely with your own resources.
What to do about services that need to be paid by credit card?
There is a chance you'll still have some expenses going through on a credit card (e.g. Netflix or other streaming services) but try to keep them to a minimum. Any expenses that must be paid with a credit card, add that amount to the minimum payment you make each month. For instance, if your credit card minimum payment is $60 and streaming costs you $15, ensure that $75 is paid to your card each month.
How to stop yourself from using a credit card?
The best way to stop yourself from using your credit cards is to leave them at home when you head out shopping (lock them up if you have to). If shopping is a favourite pastime, choose a different activity to do in its place so that you don't feel as big a void; a void will only cause you to think about shopping more than ever before.
For many, their biggest temptation is online shopping, so log out of your accounts, delete all the saved payment information (don't forget the apps on your phone, PayPal and Amazon), clear your browser cookies and put your cards somewhere where they are hard to access. Out of sight, out of mind reduces the temptation to use them.
Getting better control over your money and spending is a fabulous feeling and a reward in and of itself. As you work towards that goal, don't forget to reward yourself for mini milestones along the way. For instance, for every two weeks that you don't use your card, reward yourself with a little treat that doesn't blow your budget. Cutting credit cards out of your life, even temporarily, is bucking the trend. It will take self-discipline and conscious, diligent effort to accomplish, so cut yourself some slack if it takes a while to get the hang of it.
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