Cutting up your credit cards may be a good idea if you are addicted to spending, after all if you want to get over your addiction to alcohol, a good place to start would be to throw out all them bottles you have stashed around the house. However, while alcohol cannot possibly help an alcoholic recover, credit cards can help you get OUT of debt (under some circumstances). Here are three examples:
1. Free Financing - credit cards typically offer customers several weeks of free financing, provided that they pay off their balance in full. If you use a check or cash to pay for groceries, for example, that money comes out of your account immediately. If you use a credit card, you get to keep your money for an extra 25 days or so before you have to pay the piper. Assuming that your spending adds up to $3000 per month on average, if you can keep the money in a high yield savings account at 5% interest, the free financing the credit card company is giving you is worth about $150 a year. Take that $150 in interest and use it to pay down your student loans. Clearly, this only works if you do not carry a balance.
2. Cash Rewards - we use three cash rewards credit cards. Citibank's Dividend Platinum Select (we have two of those) and American Express Blue. Last year we got approximately $650 back in cash rewards. We use our credit cards to pay for virtually every expense, including childcare and even the smallest of grocery store purchases. At $650 per year in after-tax income, we are talking big bucks here. That money could go a long way towards making an extra payment on that mortgage.
3. Monitoring Your Spending - to get a handle on your spending, you must first understand what you are spending your money on. The problem with cash is that it does not leave a paper trail, so unless you keep a meticulous record of your spending it is tough to know where your money goes. Credit cards create a paper trail that you can analyze, for example by using Quicken (see: The Benefits of Personal Financial Software). Use this new found knowledge to build and enforce a budget.
Of course, the strategies I outlined above are only useful if your debts are not in the form of credit card balances. Credit cards CANNOT be used to help you get out of credit card debt. That is just common sense. However, if you have a mortgage, student loans, car payments etc. the strategies I outlined above can help give an extra kick to your debt reduction efforts.
One more thing. The three points I made above all depend on personal discipline. Some experts say people spend more when they are using credit cards, compared to when they are using cash (the pain factor). Some people cannot bring themselves to pay off their balance each month even if they can afford to do so. If you are one of these people or if you suspect that your resolve will waiver at the critical moment, forget about everything I said here. Get out your scissors and get on with the credit card cutting party.