Ask John: Cash Only

John, I got a letter from my credit card company and they've lowered my credit limit by over $7,000. And the very next day I got one from another credit card company and they increased my interest rate from 5.9 percent to 24.9 percent. That's it. I'm going to close all of them and just use cash from now on.

Ruth
Bloomington, IN

Ruth, I feel your pain. I have also had TWO of my credit limits reduced by credit card companies. I've lost almost $30,000 in credit limits. It's certainly natural to want to "get back at them" by closing your account. It's empowering to know that YOU broke up with THEM instead of it being the other way around.

1. You've just lost the access to capital. How are you going to pay for things now? Cash? Ha! What's cash? You can certainly use a debit card, but there are downsides to that too. No, credit cards are still important. They allow us to live a more efficient financial life.
2. You may have just hammered your FICO® scores. Closing credit card accounts can have an adverse impact on your FICO scores. One of the most important components of your scores is the ratio between your balances and your credit limits. The lower the ratio the better. If you close accounts, especially unused accounts, then the balances that are remaining represent a much greater amount of your available credit. This is commonly referred to as your utilization percentage or your utilization ratio.

The best course of action MUST be made with a clear mind and without emotions like anger and frustration driving your decision. Sit down, take a deep breath, and think about the impact that closing your credit cards could have on your life. It might force you to carry around cash — not good. It might lower your scores and cost you a mortgage loan or car loan — not good. It might make it more difficult to open a new credit card eventually once your anger subsides — again, not good.

As hard as it may be, you really must leave them open. I know it isn't what you want to do, but the best way for you to continue to function in the credit world is WITH credit cards and WITH the best scores possible.

Best of luck to you!

As always, if you have any questions or comments please feel free to drop me a line at CreditExperts@credit.com

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