Back in the day, if you needed something expensive you just saved for it. Or, you put it on layaway, or maybe joined your bank’s Christmas Club. (Kids, ask your parents.) You also may have saved for your children’s college education or your annual vacation. The prevailing attitude among financially responsible people was that “if you can’t afford to pay cash for it, you don’t need it.”
The simplicity of a “cash only” lifestyle can be a tempting — especially to those who have been burned by credit debt in the past — but often unrealistic way to manage personal finances in this day and age. Credit, when managed correctly and with a good understanding of the basics, can help you achieve major financial goals that may be out of reach for cash-only consumers.
While getting into credit card debt because you can’t afford to pay cash is always to be avoided for many reasons — it’s expensive and bad for your credit score, for starters — the convenience of not having to carry cash, the rewards programs, fraud protection and other features afforded by credit cards make them almost a basic necessity today.
But the “cash only” method isn’t the only money advice that has exceptions. What follows are some additional credit and money tips that you should take with a big grain of salt.
1. Cut up your credit cards and go cash-only.
In addition to the above financial and logistical reasons why “cash only” isn’t practical for many people, closing credit card accounts can lower your credit scores by reducing your credit availability in credit utilization calculations. In many cases, a downward spiral can develop, where you have lower scores caused by higher utilization, leading to higher interest rates, which leads to higher balances, and so on.
2. Never do something that could damage your credit scores.
Sometimes it’s not such a bad idea to take an action that could hurt your score. For example, though opening a new account can temporarily lower your score, if that new account comes with a low interest rate, high credit limit, generous rewards program, or other feature — and you don’t expect to be financing a new car or home in the next six months — a temporary hit to your score could be worth it.
3. Bankruptcy is to be avoided or delayed for as long as possible.
While bankruptcy can have a severe impact on a credit score, a worse situation for your finances is to continue to incur late payments, charge-offs and collections over an extended time period while trying to avoid bankruptcy. Without a doubt bankruptcy should be a last resort for many reasons, but if it looks like you’ll have no choice but to file, the sooner you do, the sooner your credit score can begin to recover.