Does an Emergency Fund Replace the Need for Credit Cards?

| January 7, 2012 | 14 Comments

I have two credit cards. I’ve had the accounts for approximately 4 and 8 years and they have high limits. If you know the rules on credit scoring, you know that from a credit rating perspective, I shouldn’t close these accounts.

creditcards

If you’re a Dave Ramsey follower on the other hand, you would argue that I should close these accounts. I’m stuck in the middle on this issue and here are my thoughts:

Why I Should Close My Credit Card Accounts

Even though I have high limits on my credit card accounts, I now have more money in the bank than those limits. That being said, isn’t my savings account sort of a high limit “credit card” that’s paid off in advance for emergencies? Why then, would I want to keep the credit card accounts open as well? I don’t need both, technically. Dave Ramsey’s view is that there is never a reason to keep a credit card account open. He feels that a credit score is complete bogus and has no real correlation with financial responsibility. To him, it’s just a score of how good you are at borrowing money and paying it back.

I agree with Dave on that. I don’t want to worship at the alter of The Great FICO, but for some reason haven’t gotten myself to close those accounts yet. All my reasoning says I should, but there is something holding me back. Perhaps I just want all the help I can get if I decide to get a mortgage someday after all. Maybe I just like the feeling of having the available credit if I ever want to use it, even though I never want to go into debt again.

Why I Shouldn’t Close My Credit Card Accounts

According to the information available on credit scoring, closing my accounts would essentially change my credit utilization ratio from 0% (since I don’t use them) to non-existent. According to Dave Ramsey, once I close the accounts, I would then have no open credit since I am debt free. This would cause my credit score to disappear within a matter of time. Well, Dave says that a solid down payment, solid employment history and just plain old common sense will allow a person to get a mortgage without a credit score. He says no credit score is better than a bad one. But is no credit score better than a good one? That’s the argument I’m struggling with because I do have a good one.

So basically, closing the accounts will change my credit score from being high to disappearing. That’s the decision I have to make. I do know that I don’t ever want to be in debt again. The only possible borrowing I’ll ever let myself do is a home mortgage. I do want to pay cash for a home someday, but I know that may or may not get a chance to happen. That being said, out of principle, I should close them because just using them at all is borrowing. It’s debt. Something that I am against, now.

Oh, I almost forgot. I should keep them for the miles/points, you say? I honestly don’t care about those piddly things. Personal finance is about the lifestyle, not the math. Having and using credit cards because of the miles/points is math. That won’t make you wealthy. In fact, I don’t think points will have any impact on your life at all, except for maybe tempting you to spend more and go deeper into debt so you can get the 2% cash back or free flight on your otherwise expensive vacation.

What do you think? Should I close the accounts or keep them open? I’d love to hear your thoughts.

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Comments (14)

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  1. Elizabeth T. says:

    It sounds like this may warrant a phone call to Dave Ramsey!

  2. Lisa Wilson says:

    Hi. I would keep the accounts open. My husband & I have never had a credit card & we are 48 & 51 years old. We don’t make enough to even qualify for one.Use your own judgement. I agree with lots Dave Ramsey says , but he’s not God & lots of people make him an idol. We also can’t get a mortgage loan because we haven’t had any credit. We don’t have bad credit , just none.The banks do not go on the fact that you have paid your rent & utilities on time or that you have a solid job that you have had for 12 years.We have even tried to use references from our landlord & his work, to no avail. We were told to get a secured credit card & in 2-3 months we will have a good credit score that we should be able to get a loan.I wrote a comment on GRS that might not be published because it criticizes there selling the site to the piranas.Now there are run by a company that markets all the debt that the site was supposed to be helping people get out of. Ironic, isn’t it , what people will change for a bit of money.Lisa

    • Thanks for the comment and for vising my site. I’ll take your thoughts into consideration.

    • Brad Chaffee says:

      Lisa, manual underwriting is something that can be done to help someone get a mortgage. It’s not popular and you cannot get it done at every bank but it is possible.

      I don’t think Dave Ramsey is trying to BE God but it’s hard to argue the fact that he has helped LOTS of people get out of debt. For that alone he deserves credit which I think you might be confusing for idolatry. Following someone’s advice that has proven successful doesn’t constitute idolatry nor does it mean they are close-minded to other financial “guru’s” advice — unless of course we’re talking about Suze Orman. LOL

      Ironically, I think what is most commonly idolized is the credit score which has hurt more people than it has helped.

      I have chosen to manage my money regardless of what my credit score will or will not do. I reject the credit scoring system which encourages debt in order to have something that can be saved up for anyway.

      Just my humble opinion. :D

  3. George says:

    I’m in the same boat, for the most part. I have one credit card completely paid off and the next one should be paid off sometime next month, and excellent credit.

    What I decided to do was shred the one that’s paid off. Out of sight, out of mind, and I get to keep all the years of good will I built up with that card. My emergency fund isn’t at the point where I’ll feel secure in shredding the other card right now, but I know that I’ll probably stop carrying it once it’s paid off and will likely shred it once I’m at the more secure point.

    • Thanks for visiting my blog. Yes, will be in the same boat once you pay off your second card. It sounds like you are on the side of leaving them open, but shredding them. I see the reasoning for doing things that way. That’s essentially the decision I’ve made by not making a decision.

  4. Faye Davenport says:

    Kraig, I enjoy Dave Ramsey’s program and agree with his insights. However, I would encourage you to keep the cards open. As your father did maybe you would like to stay with the same company for a long time and don’t plan on any moves. However, life does throw curve balls. You have mentioned maybe one day supporting a family and you list yourself as single. As an outsider I gather you don’t intend to be single forever and thus maybe bringing about a change. Where am I going with this? Your credit score is used for more then just borrowing money these days. Your next apartment may run a credit check in order for you to reside with them. Dave actually talked about this once, how he could buy the whole apartment complex but couldn’t rent there due to lack of credit. OF COURSE you are intelligent and I am sure you could find housing outside of corporate ran apartments. This is just the example I am going to use. As another example, I work for a private estate we consider a person’s credit as a judgement of character as part of our hiring process.
    Speaking from my personal choice, I kept my credit cards open. However I have filed the cards away in the filing cabinet. I also cut the magnetic strip in half. I couldn’t in a moment of temptation take the card to the store and swipe if I wanted to. The numbers are there, I could make an online purchase, like booking a rental car or hotel. However, I agree with Dave and my debit card works just fine for those circumstances. – Follow your heart. Best Regards, Faye

  5. I made the decision to go all cash a while back. I currently have no credit cards and I intend to keep it that way for a while. I also agree that the only reason you need a credit rating is to borrow more money. I don’t want to borrow more money so I don’t really care if my credit score is not as high as it could be if I had multiple cards open.

  6. Stacy says:

    I’d keep them open. When my husband and I went to buy a house, we had to get it in just my name because he had 0 credit. Not bad credit, just NO credit. In my state, if I were to die, our house would have gone into probate and then, it would go to my husband and my children equally. (nothing a trust couldn’t fix, but we haven’t done that yet — shhh.. don’t tell Dave). Anyway, he has since opened a credit card. We use it to pay for everything and then pay it off every month to build his credit. Our new house is in both our names and we are much more comfortable with this situation. … and still debt free (except our mortgage).

  7. Rachel says:

    I have 3 credit cards, which I’m sure most people would frown upon. However, card #1 has a zero balance and is locked away, but I keep it open because I’ve had the account for almost 10 years. Card #2 has a balance that will be paid off in 6 months, but I never use it and it is also locked away. However – I use cards 1 & 2 about once a year just to keep them active. Card #3 is a Southwest miles card and I buy gas with it, and pay it every 2 weeks no matter what. I figure, I’m going to have to buy gas anyway, so I might as well earn something for my purchases, and since I fly about once a month it works really well for me. Personally, I keep mine open just for the credit history, and it’s not hurting you to just keep them!

  8. Hey Kraig,

    I loved the post. As always! Anyway, I would suggest keeping the cards open to protect your credit score. Although you may not think you will need credit in the future, there are always emergencies to account for. By closing your account, you reduce the amount of credit available to you which may harm your credit score. Also, one of the factors used when coming up with your credit score is the average amount of time your accounts have been opened. Therefore, by closing your credit cards, this amount of time will drop to 0! This will definitely not be good for your FICO! Thanks for the great read!

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