Last Thursday (April 30, 2009), the Washington Post's personal finance columnist Michelle Singletary discussed the issue of involuntary credit card cancellation by the card issuer and its impact on one's credit score in her Color of Money column. She discusses two possible scenarios: (1) where a card hasn't been used in ages and the cardholder pays off the credit bill in full every month, (2) where a card holder carries a balance. Singletary rightly concludes that in the first scenario, there is no need for any damage control. But that is not the case for the second scenario, since the closure of a credit card will reduce the card holder's total utilization rate.
As I explained in an earlier blog posting, Credit Cards & Frugal Living, I was not happy when Bank of America unilaterally closed my AAA Visa Card (formerly a gas rebate card issued by MBNA) which has been dormant for ages. Since I pay off all my credit cards in full every month, my credit utilization rate is not affected by the closure and my FICO score remains in the excellent range.
Indeed, I totally agree with Singletary's ending sentence: "It would be great if the long-term impact of this credit crunch is people relying less on credit and more on cash." I treat my credit cards as "cash" and use them as my monthly float and to get rebates for statement credit (thereby bringing down my actual credit card bill every couple of months). As far as I am concerned, there is nothing wrong in using credit cards if you are able to withhold an equivalent amount in cash in your bank account to pay off all your credit cards in full at the end of each billing cycle. Otherwise, credit cards become a trap that ensnares a person in a vicious debt cycle.
As I explained in an earlier blog posting, Credit Cards & Frugal Living, I was not happy when Bank of America unilaterally closed my AAA Visa Card (formerly a gas rebate card issued by MBNA) which has been dormant for ages. Since I pay off all my credit cards in full every month, my credit utilization rate is not affected by the closure and my FICO score remains in the excellent range.
Indeed, I totally agree with Singletary's ending sentence: "It would be great if the long-term impact of this credit crunch is people relying less on credit and more on cash." I treat my credit cards as "cash" and use them as my monthly float and to get rebates for statement credit (thereby bringing down my actual credit card bill every couple of months). As far as I am concerned, there is nothing wrong in using credit cards if you are able to withhold an equivalent amount in cash in your bank account to pay off all your credit cards in full at the end of each billing cycle. Otherwise, credit cards become a trap that ensnares a person in a vicious debt cycle.
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