Is cutting up your credit card a sensible move?

Despite a worsening financial crisis, we are a nation that still loves to buy now and pay later. So is cutting up your credit card the correct response to these difficult times, asks John Cradden

THE suggestion that you should cut up your credit card is usually reserved for those of us who have accumulated large credit card debts and are having trouble paying them off.

But what if you don’t have any credit card debt or at least a small, manageable balance? Is it possible that we still depend too much on them?

The recession has seen a drop of about 100,000 in the number of active credit cards since January 2009, according to Central Bank figures.

But we are still a nation of credit card lovers, with 2.12 million cards in circulation.

Furthermore, while card holders paid off a massive €846m on their cards in August, they barely made a dent in their debt as they spent the equivalent figure on their cards that same month.

The average credit card debt is €1,400.

“I would have no issue in cutting up my AIB credit card in the morning,” says financial advisor Bob Quinn of Myrecession.ie.

“I use my laser card for paying for petrol, groceries and many other day-to-day items. This allows me to keep track of my spending habits when I look back at my statements.”

Temptation

Mr Quinn also has a pre-paid Mastercard from Payzone, which he uses to book frequent Ryanair flights and is the only card that allows users to avoid Ryanair credit card charges.

“As with everything, however, there are fees and charges with this card, but if it keeps my credit card balance at zero and temptation to spend at bay, then they are charges I am prepared to pay.”

Simon Moynihan, of price comparison website Bonkers.ie, says he wouldn’t be prepared to cut up his card.

“As long as the banks allow me to have one, I’ll keep a credit card with the highest limit I can get,” he says.

“I look on my credit card as a vital lifeline. It’s there for unexpected expenses like overseas medical bills, car repairs and home repairs.

“What’s great about credit cards is you can borrow on the spot, no forms to fill in, no questions asked,” says Mr Moynihan.

“But this is also what makes them so dangerous,” he adds.

Patricia Foskin of consumer financial information website Moneysavers.ie, who has used a credit card for over 30 years, says she has no plans to cut up her card either.

The main benefits for her include the 56 days of credit and being able to use it in emergencies, such as for “medical costs or indeed the volcanic ash crisis during the spring”, she says.

However, while a credit card can be an asset to your lifestyle, if it’s not if handled carefully, it can become a liability, she says.

One alternative to cutting up your card is to lower your credit limit.

“If someone cannot manage their credit card and are inclined to lose control of their spending but like the convenience, they should ask their provider to reduce their credit limit to say €500 and ring up for a once-off increase if purchasing a more expensive item,” says Ms Foskin.

Having a credit card is said to be useful for building your credit rating, as long as it is managed responsibly.

However, lowering your credit limit on your card might feasibly hurt your credit rating too.

The Irish Credit Bureau (ICB), which manages credit ratings for most banks here, bases part of its credit rating system on the model that they use in the US, called the Global FICO Score.

According to an information booklet on FICO, 30pc of your overall credit score is based on the amount you owe and the amount of available credit you have.

Although it does not specifically state that reducing your available credit will reduce your score, one consumer expert we spoke to says it stands to reason that if you have a balance on your card and reduce your card limit — and therefore your available credit — you may damage your score.

We attempted several times to contact the ICB to ask them about this, but were unable to get a response.

However, both the Irish Banking Federation and the Irish Payment Services Organisation say that lowering your credit limit would not affect your credit score.

Mr Quinn doesn’t believe that reducing your credit card limit would affect your credit rating, but if you asked that your limit be set lower than your existing balance you could end up incurring over-limit fees and penalties, he said.

This article first appeared in the Irish Independent