Wise Use of Paid off Credit Cards? You Decide.

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Paid off credit cards – shred ‘em, close ‘em, and forget ‘em – OR – shred ‘em but leave open and risk fees in hope of increased FICO score – OR – risk fees, leverage rewards, and laugh all the way to the bank!

On Wednesday I featured an article titled “More Reasons to Pay Off Credit Card Debt” where I mention a few of the ways our recent reduction in spending and use of credit has affected our relationships with our credit card banks.  In summary, the recent changes we’ve made in spending make them mad – and the ways in which they’re responding make me puke!

So… should I tie them to the bumper of my car and drag ‘em through the city streets?  Or risk navigating the shark infested waters by trying to increase my FICO score and/or exploit their rewards programs while avoiding the 47895 possible fees?

What is the most wise use of paid off credit cards?

To help me decide whether I should close the 3 credit card accounts and forgo the benefits of increased credit score and possible future rewards – or keeping them open, risk the fees, and hope my FICO score will rise… I will turn to the über-wise DFA debt slaying community.

In today’s post I will detail the three choices I am kicking around including the approach I am currently using, along with two opposing responses I received from two DFA commentators… and put them up for all of you to examine – vote on – and comment on.

Three possible approaches:

My current approach:

As of right now I have paid off all three credit cards, shredded all but one, but have not closed any.  I haven’t closed them because the word on the streets is… a paid off credit card will increase your FICO score – but a closed card will not.

“Steve in W MA” uses his cards with this system and reaps the benefits…

After getting used to using the Cash Envelope system for all my ongoing weekly and day to day spending (Food, Gas/Tolls, and Fun), I have discovered that it has trained me to stay on budget like a hawk. So now what I do is shop with the envelope in hand as well as my credit card.  I clear all purchases with my budget by first looking to see that enough greenbacks are in the cash envelope, then I use the credit card to run the purchase.  I take the greenbacks from the cash envelope and put them in a fourth envelope I carry marked “VISA repayment”.

The cash envelopes get adjusted, the Visa bill gets paid, I don’t go over budget or into debt, and I get the 1% (soon increasing to 5%).

I am astonished at how much the cash envelope system is doing for me – even though, by including use of a credit card,  I am acting  in a way staunch Dave Ramsey followers might consider perverse and twisted.

The fact that I clear all spending by checking my cash envelopes first means that I cannot fall prey to the usual temptations of the credit card including… losing track of your money, spending more when you use it, and going over budget (and risk falling into debt over time.)

I still spend at my predetermined budget limit, but I am getting the 1% back (soon to be 5%.) And for someone who watches their dollars like a hawk and spends less than $50 a week on food, that one percent, or $2-$4 a month,  is appreciated and will go to good use. Once I am getting 5%, it will be $10 a month.  $10-$20 is decent money to be had – if and only if you are sure you aren’t losing $200 out the other end by overspending. However, the cash envelope system as I describe here prevents that overspending.

I would only recommend doing this to people who:

  • are familiar with and  use a cash envelope system as well as a master budget system
  • have been successful at using the strict normal cash envelope system for several months and therefore have begun to associate normal spending behavior with  checking the envelopes and pulling out cash, rather with reaching for your credit or debit card
  • in general are no longer as tempted by the lure of spending.

My long term experiences have shown me that using a credit card without a similar system of proven success, or while still experiencing spending temptations, will most definitely cause you to overspend.

Whereas Mr. Not the Jet Set holds a completely different point of view…

Matt – love the post.

First – “Can’t you just see the execs of Capital One, Citibank, etc. sitting around in a board room coming up with new ways to screw us out of our money?”  Yeah, I nearly fall off the couch laughing at these new credit card commercials & how they wanna be your buddy again. “Yeah, yeah, we hate debt too, so we’re giving you 17 new BS features to help you, ya know, pay off your debt or something… oh and we’ve got this sweet rewards program too…” As if.

Second – I’ll join the chorus here and challenge both you and Peter to shred those cards. Burn’em. BBQ’em. Whatever! Ditch the credit cards and their never-ending schemes. Then come back in a month, 3 months, 6 months – tell me if you really miss it. It’s not like you can’t go out and get another card if it’s really that awful.

It’s a much simpler life.

What do you think?

Kill credit cards & bury ‘em in the back yard – Leave them open but shred ‘em – or use & abuse them and beat credit card banks at their own game?  That is the question!

Here is a poll.  Weigh in with your opinion… I’m really intrigued to find out what the majority of DFA readers think.

[poll id=”4″]

Where is Mr. Credit Card when you need him?

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