How To Get Rid Of A Credit Card

Lynn Windle, like most Americans, never saw a problem with having credit cards. A 50-year-old realtor from McKinney, Texas, she never really thought about how credit cards affected her finances, until the day she got in a fight with one of her credit card companies over their interest rates.

"They doubled my interest rate to somewhere in the double digits and piled fees on top of fees over one late payment," Windle explained. "It was essentially loan sharking, and they refused to work with me. I got so mad, I closed the card immediately. Then I went through all my credit cards and was stunned to discover how much I was paying in interest. I closed all of them as fast as I could."

That was in the mid '90s, and Windle has been living without credit cards ever since. These days more and more people are equating credit cards with debt and are opting to live a credit card free life.

Jen McDonough and her family paid off $150,000 in debt while closing out their credit cards, and she says they will never go back in debt again. She explains the greatest hurdle to overcome is making the decision to get rid of your cards.

"There is such a fear of letting credit cards go," McDonough said. "It's a great marketing technique to put that fear in people. Don't be afraid to do it."

Overcoming that fear can be difficult, especially if you have relied on credit cards your entire life as your safety net. Operating in a world without credit cards can be daunting, but if you have a plan and know what to expect, it is an easier transition than you would think.

How to properly live without credit cards

Budget, budget, budget: Budgeting is your greatest tool in living without credit cards for two reasons. First, you need to budget enough money each month to pay off your current credit card debt, and the sooner the better. A good way to get ahead of your debt is to apply for a balance transfer credit card. (Yes, another credit card.) Look for a card with a zero percent introductory APR, which will save you from paying interest for anywhere from 6-18 months and no or low balance transfer fees which will save you additional money. Using a balance transfer card to consolidate all your credit card debt on one card will help you get rid of all your other cards.

Second, you should set enough money aside each month to create a savings account for any emergency spending, like for home repair or unexpected medical bills. Look for savings accounts with high APYs, so you can make the most off your investment. Online savings accounts are a good idea because they offer the highest APYs and allow a limited number of withdrawals, which can curb spending temptation.

Don't cancel your credit cards if you don't have to: When most people decide to live without credit cards, they end up canceling the cards without regard to the consequences. Yes, canceling your credit cards altogether will obviously reduce the risk of spending what you can't afford. The problem is that it will also hurt your ability to receive other lines of credit, whether that be a car loan, mortgage or student loans for your kids. A better option is to pay off all of your credit cards, and then stop using them instead of cancelling them.

"Many people think they're being smart by streamlining their finances and cancelling unused cards," explains Gail Cunningham, Vice President of Membership and Public Relations at the National Foundation for Credit Counseling. "Yes, removing plastic from your wallet removes temptation to spend, but closing a card lowers your credit utilization ratio. For example, you owe $3,000 with $10,000 of available credit. You close one card which has a $2,000 line of credit. Suddenly, without spending a dime, you now owe $5,000 relative to $8,000, making you appear over-utilized."

Make sure you have other types of credit: If you do plan on canceling your credit cards, you should keep a diversified credit portfolio full of other types of credit, such as mortgages, auto loans, student loans, etc. While not having credit cards will decrease your available credit, which could hurt your credit score, having these other types of credit will help balance out your credit score and show the credit bureaus that you still know how to utilize the debt you have.

"If someone is living without credit cards, but has other types of credit -- mortgage, auto loan, line of credit, personal loan, student loan -- they would have a FICO score based on how they are managing that credit," Anthony Alexander Sprauve, Director of Public Relations for FICO, said. "If someone has no open credit accounts of any kind within the last two years, they will not have a credit score. In that scenario, it would be challenging, but not impossible for them to get credit."

Try a secured credit card: If your score does take a hit after cancelling your cards, or you want to prevent that from happening altogether, try getting a secured credit card. Since secured cards have lower limits -- $250 to $500, usually – and the cards report to the credit bureaus, they are good option for people who don't want to accrue debt but still need a credit card to improve their credit score.

"The only other issue [I had with canceling my credit cards] was in 2010, when I purchased the home I live in now. By then all the good credit had aged off of my credit report," Windle explained. "There was nothing there except a car payment. That helped, but it wasn't enough. I had to open a $300 secured credit card to help bump up my score."

Keep track of your credit score: Living without credit cards may be damaging to your credit score, which may make it difficult to get loans or a mortgage. As your good credit ages out of your credit report, your score will drop, so keeping a close eye on your credit score can alert you to when you need to start rebuilding your credit with other types of loans.

It might also be a good idea to sign up for a credit report monitoring service so you can keep track of how your score is being affected by your lack of credit cards. These services also alert you when there are any changes in your credit report, so they can also help protect against identity theft and fraud.