The 1 Credit Card Life

NEW YORK (MainStreet) — Americans have too many credit cards – 609 million to be exact, according to the Federal Reserve Bank of Boston – with an average of 2.7 credit cards per consumer.

While it may be easier to pay with plastic than cash, credit cards can pose severe dangers to your financial well-being.

The more credit cards you have, the more likely you are to rack up thousands of dollars of debt. The average household has $15, 788 in credit card debt, according to creditcards.com, and the interest alone can be paralyzing.

Without a credit card, the only option is cash. You won’t be able to spend beyond your means, but with cash, you don’t have to worry about getting into debt, paying interest or late fees or damaging your credit score.

Consider this revolutionary proposal: carry only one credit card in your wallet, using it to build credit and for unexpected emergencies. Credit cards should not be thought of as a way to extend our spending abilities, but instead as a tool to reach a high credit score.

If you already have more than one credit card, the solution is simple: cut them up. Keep the credit card with the lowest interest rate in your wallet, but for the other cards, just get rid of them!

You should, however, keep the other accounts open, especially if your card is several years old, since that will damage your credit score by eliminating vital credit history. That credit history accounts for 15% of your credit score.

Also, closing down a credit card account can cause even more damage to your credit score if you have credit card debt. Let’s say you have three credit cards, each with a $5,000 credit limit, totaling $15,000.  If, for example, you owe $3,000 on one card and $4,000 on the other card, but nothing on the third card ($7,000 in debt), then your debt to credit limit ratio (also known as your utilization ratio) is about 47%. If you close down that third credit card, you now only have $10,000 of available credit instead of $15,000 – you still owe the $7,000, so your utilization ratio increases to 70%.

Your utilization ratio makes up a whopping 35% of your credit score – the goal is to have the lowest utilization ratio possible. Closing down a credit card account, as explained in the scenario above, can raise your utilization ratio, which causes your credit score to plummet.

bY using cash instead of credit cards, you will stop shopping when you eventually run out of cash. With credit cards, there are no boundaries.  When making a purchase in a store, physically removing cash from your wallet and being able to see exactly how much money you’re actually spending (rather than a quick swipe of a credit card) will force you to ponder whether or not it’s worth it to shell out your hard earned money to buy something you probably don’t need.

By the way, debit cards are not the solution either. Most debit cards charge transaction fees every time you use them. The best way to get out of debt? Stick to the paper.

- Scott Gamm is the founder of the personal finance website HelpSaveMyDollars.com.  He has appeared on NBC’s TODAY, MSNBC, Fox Business Network, Fox News, ABC News and CBS.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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