I received an email from a friend the other day about his credit limit that made me very happy. Here’s what he wrote (typos and all):
So I have 3 credit cards (4 depending if my debit card counts because sometimes i get charged credit when the place doesn’t have debit option).
I’m don’t have the self-control I’d thought I’d have, at least when I’m drunk, and I want to finish off paying the balance off once of the cards and then cancel it.
How would this affect my score? To be frank, the limit on that thing is 6K, and the other two are 2K and 5200. I want to cancel the 6K one because it’s dangerous for me to be having that.
Separately, can you ask to have your credit limit reduced? Id like to knock down the 5200 to 3k.
Any insight would be appreciated.
Many of my posts promote credit card usage and credit line increases, BUT it only works if you use it responsibly. That means if you tend to overspend, you should take steps to fix these habits before playing with credit. As my friend mentioned above, it is dangerous to hold credit if it gives you a false sense of wealth. You are borrowing when you are using credit. Any potential rewards you may get from credit cards vanish immediately once you start getting into debt.
I’m happy that my friend can see past the credit card rewards and admit he has a hard time controlling his credit card usage. Frankly, this is a problem that plagues young people. It’s easy to go out and have fun, and then deal with the aftermath the next day.
Here are some of my thoughts.
- Canceling your cards will have a small affect on your credit score temporarily, but it’s something you can recover and the negative effects would be way worse if you started getting into debt. Cancel if you have to, it’s okay you can make it up later.
- Lowering your limit may help, but even if you got your card lowered to something like $500, you still have room to go out and spend $500 in a night.
You have to start from the ground up. Here’s what I suggest:
- Go cold turkey. If you’re addicted to your credit, throw it all in a drawer. Do what you have to. Have a friend/roommate lock it up for you. If you have to, cancel the cards. But if you can avoid it, hold onto the cards.
- Only use debit and cash. If you’re going out, take out only the cash you want to spend and bring your debit card for emergencies. Your spending for the night is over once your cash runs out.
- Budget out your money. I hate budgeting as much as anyone else. It’s almost impossible to stick to a budget. And then you have to stick things in arbitrary categories. But having a very rough estimate of what you can spend every month helps a ton. I just did it last weekend and it’s given me so much perspective. I’ll do a separate write up for that.
- Get used to what you can afford. If you’ve been used to going out and buying shots for everyone on your credit card, going out on a tighter budget may be a bit of a shock. After you have a good understanding of what your more reasonable and affordable night out is like, you can start easing back to using a credit card.
- Treat your credit card like a debit card. Most credit card companies let you make multiple payments in a month. For example, Citi let’s me pay up to 6 times in a month. I like to check my credit card about once a week and just pay off the balance at that time. It gives me a better sense of how much I have in my checking account.
If you aren’t using your credit card well, don’t delude yourself. It’s a pretty common problem, and it’s one that you should take on today. Poor credit card usage will in fact lower your wealth. My experience is that there doesn’t seem to be much of a middle ground. Either you use your credit card well or you use it poorly.
If you read this and think to yourself that you need to fix your credit card spending habits, make a commitment down below. Fix your spending habits before you do some real damage. Be smart enough to recognize when you are not using your credit card well.
If you do use credit responsibly, how did you learn to do so?