The scary step of cancelling my only credit card
I'm debt free and I've successfully avoided using my only remaining credit card for over a year now. Its balance has been sitting at zero since March 2019. Because of that I've been really tempted to just cancel it. All it has been doing since then is accrue an annual charge that I could have budgeted otherwise.
The hard part is that it really freakin' scares me to cancel it. What if I suddenly need it? What if my budget contains a glaring hole for the past year that I've just not realized and I'll be in deep trouble?
I am fairly confident that I should have everything I need to cancel the card: A MasterCard debit card that works anywhere a credit card would. Enough funding in my long term categories for almost a year. As a result of that enough money in my checking account to fund the debit card. Parents and friends who could help me out in a pickle, and with all probability the eligibility for a one-off loan if ever needed.
So why is this so hard for me? Should I jump into the cold lake of cancelling my last credit card?
Are you in the US? If so my personal recommendation would be to cancel the existing credit card but to get a credit card with no annual fee (Capital One has many, the Citibank Double Cash has no annual fee, Chase Freedom or Freedom Unlimited, or Discover). Sure you have enough in your checking account to cover a big unexpected expense but if you have a credit card, you could actually keep less in checking and more in a savings account and earn more interest.
I don't have to watch my spending if I follow my categories. If there is enough money in the Clothing category and I want to buy a pair of shoes, there is no reason not to buy the shoes. The way I allocate my funds to my categories reflects my values, so once I have done that, there is no guilt in spending.
Just get a different card to keep around that doesn't have an annual fee. We aren't anti-credit card around here, we are anti-debt, but credit cards are a useful method of paying for budgeted purchases. I closed all my credit cards last summer when following Dave Ramsey's plan, but then I regretted it and have gotten new ones trying to build back my credit. Turns out, now I can get 2% cash back everywhere, so I'm glad I upgraded my rewards, but I wish I hadn't closed my oldest accounts.
Thank you all for your advice. I forgot that in the US there's a lot more importance connected to owning a credit card.
I'm realizing that in Europe we live in a different reality credit card wise and I should probably ask somewhere less US centric. Many people here don't own a credit card because they literally never need one, instead relying on less universal but long established card payment methods, cash and direct debits. Our credit scores care little about us owning one.
I would recommend you keep it. Renting a car, hotel room, etc. can be difficult with a debit card, as some places require other items (copy of bills, etc.) before allowing you to do that (at least in the area of the US I am in).
Also, if the debit card gets hacked, that is your money that is gone. When it's a CC, it's the CC companies money.
If you are not using it, just keep it in a drawer or safe so you have it in the event you ever need it.
If you have Costco's where you live, their rewards CC is awesome with cash back to the point that I use it for every purchase I make.
I normally get between $600-800 back every year, so this also pays for my membership at Costco, as well as returning some cash.
I highly recommend getting another credit card before cancelling that one because you never know when a situation may come up when you absolutely need credit. That said, there's no need to pay an annual fee. I have a Bank of America Visa Cash Rewards Signature (red) card. It pays 3% on gas, shopping or restaurants and has no fee whatsoever. f you pay it off every month vigilantly, you can earn money and not pay interest. Once you get a no-fee card, cancel the one the one you have. You can't really build a strong FICO score with no credit cards.
Also, if the debit card gets hacked, that is your money that is gone. When it's a CC, it's the CC companies money
I may be wrong, but it's my understanding that Europe has much better rules for debit cards than we have here in America. I don't think that's really a concern for them. Personally, for those exact reasons, I would never use a debit card, but here in America the rules are different.
As said above, change it for a credit card with no annual fee. Some uses require a credit card (hotel deposits and car hire deposits are often not accepted on debit cards).
Also, in some countries (I'm not sure about Germany, so can only speak for the UK) you can get additional protections on purchases made on a credit card. For instance, in the UK, if a purchase is for over £100 (even if you only put 1 penny of it on the credit card) Section 75 protection renders the credit card company jointly liable for the whole amount (not just the amount put on the credit card) with the vendor if something goes wrong with the transaction (vendor goes out of business without delivering what you've bought, misrepresentation of goods by the vendor, breach of contract etc.)
You don't have this section 75 protection with debit cards.
I agree these replies are very US centric. I would never have thought about owning a credit card in France, I don't think I would have had access to one actually.
It might be necessary to have one if travelling but it depends where. When I lived in Japan my debit card worked better than some credit cards.
Do you have any access to overdraft? That's what I would use in France if needed. It was free up to -700€, at least for me which was enough to cover reimbursements for example.
We started our consumer debt free journey in August 2013 and began closing many of our credit cards by 2015. However with some uncertainty in doing so we did hold on to one for a full year before closing it in 2016. Our reason for closing the final one was that we have not encountered a scenario since August 2013 where we actually needed a credit card. We keep our emergency fund money in a money market fund with a different financial services institution for ACH transfers only. We observed that any potentially fraudulent debit card transactions were denied by our our bank and they in turn asking for confirmation via text message and email. We have travelled in the US using a debit card for airfare, hotel, and car rental with no issues. For us are biggest driver was removing ourselves from becoming/remaining dependent on credit or any of those reward programs.