Tuesday, Feb. 2, 2010
THINKING OF CUTTING UP YOUR CREDIT CARDS? A K-STATE FINANCIAL EXPERT DISCUSSES BENEFITS OF DITCHING THEM AND WHAT TO CONSIDER BEFORE GRABBING THE SCISSORS
MANHATTAN -- Getting a new financial start in the new year may mean ditching credit cards in favor of cash.
Although living without credit cards has financial benefits, a Kansas State University expert said there are a few things to consider before taking scissors to your plastic.
"Living card-free takes away a lot of the spending temptations and generally results in increased savings capability," said Jodi Kaus, who directs K-State's Powercat Financial Counseling.
The center, which had its grand opening Jan. 27, improves the financial literacy of K-State students and provides professional counseling experience for students studying personal finance at K-State.
"By paying with cash, you will be paying closer attention to your finances, as you'll need to know exactly how much you have to spend before spending it," Kaus said.
She said studies have found that paying for purchases with plastic changes behaviors and makes consumers less price-sensitive and more extravagant. Paying with cash, Kaus said, you're more likely to keep spending to a minimum.
"Living without a credit card is possible, although a little more effort may be required," Kaus said. "Lifestyle choices regarding spending habits, travel habits and the like have an impact on whether living without credit is practical."
Rather than relying on credit for emergencies, Kaus said everyone should have an emergency fund for any unexpected events.
"If you're stranded with little cash and need a tow service, for instance, your debit card should work," she said.
Those who travel may find it more difficult to book a hotel room or airline reservation without a credit card, but it's not impossible. Kaus said that with some effort, travelers may be able to find hotels and airlines that accept reservation prepayment through alternative methods.
Debit cards may work, but depending on the hotel policy, they may require a hold on the account for a certain amount. Kaus said that for late arrival at a hotel -- usually after 6 p.m. -- a credit reservation generally is required.
Kaus also said that closing credit accounts can drop your credit score, because it factors in your ratio of debt to available credit.
"For example, if you have three credit cards with a $500 credit limit and $100 of debt on each, your total available credit is $1,500 and your total debt is $300," she said. "If you close one of those accounts, your debt is still $300, but now your available credit is down to $1,000. So the ratio of debt to credit went from 20 percent up to 30 percent."
Kaus said that this may not have a big effect on people who already have a high credit score or who are not applying for a loan any time soon.
"Otherwise, you may want to simply put the card away in a safe place where you are not tempted to use it, making a small charge on it occasionally to keep the account open," she said.
Kaus said young people should be credit card-free until they learn basic financial management skills. They can start with an ATM card then a checking account and debit card.
"I think there are benefits to living without credit cards until basic skills of budgeting and timely bill payment are practiced and understood," she said.
Powercat Financial Counseling provides free information and education to K-State students who are seeking help with financial issues. For more information or to schedule a financial counseling appointment with Powercat Financial Counseling, visit the Web site at http://www.k-state.edu/pfc/