3 Reasons Why I Cancelled My Credit Card
When used properly credit cards can be a great thing. They’re convenient if you want to purchase large items, handy for travelling overseas, provide fraud protection and provide other financial benefits.
I used to have a great card with a very good reward system. I paid it off every month so I wasn’t paying interest, and the whole thing definitely made sense on paper, but I decided to cancel it anyway.
While this may invoke shock, and even horror, in those who couldn’t live without their credit cards, there are actually a few good reasons behind my decision. Here’s the main gist of them:
Feel the pain of spending
Using a credit card to make purchases is easy. Too easy. You don’t have to consider if you can afford to pay for the item right now, because you’ve got a whole month (or more!) to pay it off.
Unfortunately during that month you’ll make further purchases, so by the time your credit card bill comes around you may not have the readies to pay it off in full. That’s where the card issuers make their money, by charging you high interest on your debt.
I found that I was using my card way too often, somewhat blinded by the delay in payment (“let future Ethan deal with that”) and the awesome rewards system (“it’s like free money!”). I wasn’t paying off each purchase as I made it, I was waiting for the monthly bill to come around, and that was usually a lot higher than I would have estimated. While I always made the payment in full, I still felt slightly out of control.
In short, by cancelling my credit card it let me feel the pain of spending, when I spend money I actually have. By not being reliant on my credit card I effectively re-learnt the value of money.
Avoid the annual fee
This is definitely not the main reason why I closed my card, but it sure is up there.
Most credit cards charge an annual fee. Depending on the type of card, and the rewards program offered, this can be quite hefty.
You could argue that annual credit card fees are worth it if you’re getting shopping vouchers, travel credit, restaurant discounts and the like, but a lot of the time the perks don’t really justify the annual fee. Hey, every business needs to make a profit, I get that. But don’t feel too bad for the cards issuers, they’re making great money on interest charges and of commissions they’re charging the vendors.
Improve my borrowing power
The card issuer loved to offer me higher and still higher card limits until it got a bit ridiculous. I couldn’t imagine ever using that much money every month but still it was kind of nice they trusted me enough to offer it.
However, your credit card limit has a direct effect on how much money a bank will lend you for a mortgage or any kind of personal loan.
So you might think having a higher credit card limit is a kind of security blanket but in reality a lender will be looking at your repayment serviceability. That is, not just the amount you currently owe on your credit card but what your total repayments are if you max it out!
Having more than one credit card could hurt your borrowing power even more because a lender will take into account the total credit card limit you have for all the cards.
So you want to close your credit card account….
I’m not trying to put you off using a credit card but there are a lot of benefits to not having one too as I’ve mentioned. However, don’t think you can just cut your card in half and it’s automatically cancelled, the account will still be active, and incurring annual fees.
You may have to jump through a few hoops to get the account closed, so here’s what I did to avoid any issues with interest and fees:
- Pay off the balance in full
- Stop any automatic bill payments
- Wait a couple of weeks to ensure the balance is $0
- Call the credit card company to close the account
- Get a written confirmation that the account was closed and no further funds are oweing