It's easy to despise the credit issuers.
Who else should we blame for the ugly state in which our credit card industry exists today? Should we blame consumers for making poor financial decisions and living beyond their means? Perhaps Congress for taking so long to get its act together? Why not blame Bush? He's an easy target for just about anything bad that's happened to our country and the economy.
The fact is everyone must take some of the blame for where we are today, but credit card companies tend to stand a notch above the rest for one specific reason- they made an absolute killing off the excessive fees and interest rates that have plagued the industry for decades. And now many of the largest players are getting bailed out with the taxpayer dollar while the consumers that made them billions are left high and dry.
Angry customers that have had credit limits cut, interest rates doubled, and accounts frozen are feeling like they've just had enough. So, is it time to finally cut up all those credit cards, close your accounts, and start paying for everything in cash from this point forward?
While it may sound like a novel idea at the moment, here are a few important things to remember before you go searching for the scissors.
Never Ignore Your Credit Score
30% of your credit score is driven by the proportion of total balances on credit lines to total credit limits for revolving accounts. This is often referred to as your credit utilization ratio, and it's best to keep this number under 10 percent.
Cutting up your credit cards and closing accounts will immediately reduce your total available credit and increase your credit utilization ratio, thus negatively affecting your overall credit score.
A better choice is to leave the accounts open. Instead, focus on controlling your spending, increasing your total available credit, and paying your monthly bills in full. That's how you play the credit game.
Credit Still Counts
Yes, using plastic can get you into financial trouble if you don't understand the basics, but obtaining credit and managing it responsibly will always play an important role in your personal financial life. Likewise, you can't ignore it if you wish to leverage "good" debt to increase your net worth in the long run.
Lenders will always want proof that you can responsibly handle various types of credit including installment loans, mortgages, retail accounts, and credit cards. Employers may be hesitant to hire you if you haven't demonstrated financial responsibility in the past. Likewise, landlords, insurance companies, and even utility companies may check your credit before choosing to do business with you.
Credit is and always will be your personal reputation in the financial world. Take the time to educate yourself, play the game, and be a smart consumer—you won't regret it.
