Can I Live Debt Free While Still Using Credit Cards?

While providing help with debt, one statement credit counselors at our credit counseling service hear frequently goes like this:

"I have such bad credit. Once I pay off these credit cards and become debt free, I swear I'm never going to use credit cards for the rest of my life!"

Sound familiar? Credit card debt can accumulate rather quickly and for a number of reasons. Perhaps you lost your job and had to rely on credit cards for groceries and other necessities? Maybe you experienced an unexpected illness and had to use the credit cards to pay for expensive medicine? Could it be that you had lapse of judgment and used the cards for frivolous items? No matter how you got into the situation, you swear you're going to get help with debt, pay it off and not let it happen again.

However, giving up credit cards entirely may not be the best option. Here's why:

1. Safety. It's not always safe to be carrying large amounts of cash while shopping, especially when making large purchases. If thieves see a large sum of cash being pulled from a wallet, you may quickly become the target of a burglary. There is less risk associated with a credit card because you are usually only responsible for $50 of any fraudulent charges.
2. Convenience. Have you ever tried to make hotel, airfare, or rental car reservations without a credit card? It's not easy. Granted, you could use a debit card, but beware. Hotels, rental car agencies, and gas stations are just a few of the vendors that may put a hold on funds above the purchase amount as a deposit. If this is not planned for, it may cause you to become overdrawn on your bank account.
3. Credit History. You may be able to live your current debt free lifestyle without the convenience of credit cards but building good credit history is important, especially if you need to overcome the bad credit in your past. The average consumer will need to borrow money to purchase a car or house. In order to be approved for a decent interest rate, you will need to have a good credit score and history. Following is a general breakdown of what goes into your credit score:
   • Payment History 35%
   • Amounts Owed 30%
   • Length of Credit History 15%
   • New Credit 10%
   • Types of Credit Used 10%

It's hard to show a consistent payment history if you do not have any lines of credit. Plus, a healthy mix of types of credit accounts for 10% of your score. While you don't want to have too many credit cards, one or two should create a healthy balance. By closing older accounts, you may actually hurt your credit score because you may be shortening the length of credit history.

If credit cards aren't evil, how do I use them without getting myself back in debt?

Like many things in life, moderation is the key. Just because you may have a $3000 credit limit doesn't mean you can justify taking a tropical vacation or buying a designer handbag. If you get in that habit you may be looking for help with debt again. Use your credit card only when you know you can pay the balance in full when you receive the bill. Did you save for that tropical vacation for the past year and now have the cash in the bank? Then, absolutely use the credit card to pay for it. Otherwise, use the credit card for simple items that are already in your monthly budget, such as a tank of gas. As long as you are paying the balance every month, you will still be living debt free and your wallet won't be taking a hit for creating a good payment history. Also, make sure you're not using a card with an annual fee!

Don't think you have the self-control? That's okay. It's important to know your strengths and weaknesses. If you can't handle a trip to the mall with the temptation of a credit card, try one of these tricks recommended by our credit counselors:

1. Freeze your credit card in a block of ice. By the time it thaws out, you will have had some more time to contemplate your purchase.
2. Leave the credit card with a spouse or trusted friend. Let them hold you accountable. If you can prove to them you can afford the new purchase and it is a good use of your money, then they can release the card to you.
3. Use the three day rule. See something you absolutely must have? Leave it at the store and go home. Chances are you will forget all about it after a couple days. If you can even remember what you wanted three days later and can still justify the cost, then go ahead and buy the item.

Credit is a powerful tool that can be used in your favor or it can be used against you. Even after bad credit, with a little self-control and careful planning, credit can be used both as a convenience and to help you achieve your financial goals.