You’ve finally paid off that credit card. It’s sitting there with no balance on it and you regret ever owning it. It’s got a high interest rate and no rewards program and you will never use it again.

But should you close it? This is an interesting debate that often comes up in personal finance circles. I think there are benefits and drawbacks no matter which you choose and the “best” answer isn’t absolute in all cases.

So let’s dig in.

If you keep the card…
If you decide to keep the card, there are a few things you should think about.

First, simply having the card is a small identity theft risk. If you’re no longer actively using the card, the risk is pretty small, and you can make the risk even smaller by taking action.

Second, not closing the card opens the door to spending temptation. Obviously, if you have the strength of character to pay off all of that debt, you’re able to keep the temptation in check.

There are two big steps you can take to reduce the two risks above even more, chopping them down to an incredibly tiny sliver.

For one, destroy the physical card. Cut it up so that there’s no risk of losing it or having it stolen. I tend to actually melt used credit cards over an open fire (seriously – I’ll toss them into campfires).

For another, remove your credit card information from any online retailers that may still have it. Check your Amazon account or any other retailers you might use and make sure your zero balance card isn’t listed there. Just get the information completely out of the system.

If you cancel the card…
Let’s say you decide to cancel the card. What are the drawbacks of canceling it?

The big one is that canceling a card results in a negative bump on your credit score. This negative bump goes away after roughly a year, but during that year, your lower credit score can have some short-term negative implications. It can cause your insurance rates to go up. It can reduce your chances for getting work.

The big one, though, is that it can also hurt you if you’re attempting to get a mortgage. A lower credit rating right at the time when you’re attempting to secure a home mortgage is not a good choice.

So what should I do?
From my perspective, the answer is simple. Before you do anything, ask yourself if you’re going to be changing jobs or getting a mortgage or a car loan in the next year.

If you’re looking forward to a major move like this in the short term, don’t cancel the card. The risk of the short term drop in your credit rating is higher than the risk of just cutting up the card and forgetting about it.

Instead, cut up the card, but hold onto the account until you’re past that hump that you’re facing in the short term. When you’ve made it, then make the call and cancel that credit card.

On the other hand, if you don’t see a major move in your future, cancel that card. Doing so eliminates the temptation and eliminates the (small) chance of identity theft.

Samantha writes in:

I don’t understand why I need credit at all. Credit just gets you into debt and you wind up paying interest to other companies. What’s the point of throwing my money away like that?

Samantha asks a really good question here – and in some respects, she’s spot on. Poor use of credit is a big net loss for people. Because of the interest payments, you lose far more than you gain.

However, there are a lot of upsides to healthy use of credit.

First, a good credit rating helps your insurance rates. Insurance companies use your credit rating as a factor in determining what sort of rate to offer you on homeowners insurance, auto insurance, and life insurance. The higher your credit rating – meaning the more reliable you are at obtaining credit, then paying the bills faithfully – the better you seem as a risk, because people with high credit are statistically more likely to be safe drivers, safe homeowners, and likely to live longer.

Second, a good credit rating helps you with employment options. Similarly, many employers run credit checks on potential employees and, again, are much more likely to hire people with strong credit because it’s a clear indication that they’re reliable.

Third, credit often offers great buyer protection. If you use credit to make a purchase – particularly credit cards – the cards offer a lot of protection against fraud, identity theft, and other serious problems. If you pay cash, you miss out on those protections.

Fourth, a good credit rating helps you with renting. Even if you’ve made the decision to entirely avoid credit and rent until you can write a check for a home, your credit still affects your housing because many landlords – particularly those in charge of higher-end housing – will check the credit ratings of potential renters and will reject (or charge a much higher deposit) people who have no credit or poor credit.

In the end, it pays to have a strong positive credit rating. This does not imply, however, that it’s good to be in debt. You can have a great credit rating without digging yourself into debt. Here’s how.

First, get a credit card. If you have no credit history, you can usually get one with a low credit limit pretty easily. Look for one that has some sort of bonus connected to a retailer you use. If you shop at Target, get the Target Visa. If you shop at Amazon, get the Amazon Visa. If you get all your gas at BP, get the BP card.

Second, use the credit card for routine purchases. If you stop for gas, use your card and pay at the pump. If you’re at the store buying some items you need and would buy normally, use your card for that routine purchase. Other than these events, forget about the card entirely.

Then pay off your bill in full each month. If you stick to just using the card for routine purchases, you should have no problem whatsoever paying off your entire bill each month. Thus, you never incur debt that generates interest.

Instead, you get all the benefits of a positive credit rating – lower interest rates, better job application success, buyer protection on some purchases, and better housing opportunities – plus the benefits of the rewards of a good credit card – discounts at the retailers you already use. Together, these add up to a net positive, and if you’re disciplined enough to keep yourself from using the credit card for purchases you would not make without it, it’s nothing but a positive.

Here’s another way to think about it. Your credit rating is simply the method many businesses use to figure out if you’re reliable or trustworthy. If you are, they see you as having more value – you’re likely to be a better employee, you’re less likely to have insurance claims, and you’re more likely to pay your rent. By avoiding credit, you’re sending no signal at all to them – and thus they’re unable to decide if you’re reliable or not and thus won’t offer you the best rates.

Positive credit helps you in many ways and saves you money consistently. Don’t avoid all credit because of a fear of debt – responsible people can enjoy all the benefits of good credit without the drawbacks of bad debt.

Good luck.

On Tuesday, the Senate passed the Credit Cardholders’ Bill of Rights Act of 2009, an act that will quickly be passed into law with the signature of President Obama, likely within the week. This bill has a huge number of ramifications for credit cards – for users who are late on their payments, for those who pay their bills on time, and perhaps even for the ability to use credit cards in stores.

Washington Wire summarizes the bill very succinctly:

Existing balances: Issuers cannot retroactively change the rate on an existing balance unless the account is 60 days delinquent.
Payments: A consumer payment above the minimum applies first to the balance with the highest rate.
Teaser rates: Issuers cannot raise rates for the first year after an account opened. Promotional rates must last at least six months.
Bills: Issuers must send a bill 21 days before the due date.
Over limit: Issuers cannot charge over-limit fees on credit cards unless the consumer has signed up to allow such transactions.
Minors: For consumers under 21 years old, a company must get the signature of a parent or another to take responsibility for the debt, or it must obtain proof that the under-21 consumer can repay credit.
Disclosure: Cardholders must get 45 days notice of change in terms.
Fees: Issuers cannot charge fees to pay by mail, phone, and electronic transfer or online, except for expedited service.
Gift cards: All gift cards must have at least a five-year life.

Meanwhile, The Wallet offers a few predictions for what this means:

“We’re in uncharted territory here,” says Curtis Arnold, head of CardRatings.com, a credit-card comparison site. Mr. Arnold says consumers can expect issuers to work overtime to lure high-end, high-volume clientele while adding fees and rate hikes for customers with less-than-stellar credit profiles.

The rationale is that credit-card issuers make money off interchange fees (fees merchants pay to card issuers). So customers who charge everything and pay off their balances are seen as less risky and still profitable by card issuers.

The future of rewards programs is also up in the air. Mr. Arnold advises cashing in reward and airline mile points, as their purchasing power has been on the decline in the last year or so. However, he points to new cards from brokerages like Charles Schwab and Fidelity, which offer higher cash-back rewards that lure customers to their brokerage products.

Mr. Arnold also advises those customers with existing balances to pay them off as soon as possible and consider transferring them to smaller banks and credit unions, which may be able to offer more generous rates and repayment terms. He, and others in the industry, expect interest rates on existing balances to keep climbing before the proposed legislation kicks in. (An optimistic guess would be that card issuers would have to comply nine months or a year from now.)

Something else to keep an eye on: Annual fees. The era of reward cards, or even non-reward cards, with no annual fees may be at an end. Stay tuned to notices from your card issuers and the changing fine print of your statement

So what does this mean for you?

First of all, these rules do help people avoid getting into trouble with credit cards. I applaud the change that requires minors to get parental approval or to prove they have the ability to repay before getting a card. I also like that all extra payments always go to the portion of the balance with the highest interest rate – no more shenanigans with companies applying overpayments to 0% balance transfers. Eliminating fees for different types of payment is also a plus.

But what else will change? It’s important to remember that the full ramifications of this bill won’t be seen immediately. Obviously, the credit card companies will try to keep their level of profits the same, which means that, inevitably, they’ll have to change their business in some ways. However, as Arnold noted above, they don’t want to kill the golden goose – the interchange fees that they rake in as a result of wide credit card use.

So, beyond the immediate impact for credit card users noted above, I’m going to make a few predictions about how this bill will affect things over the long term.

Interest rates will keep climbing. The days of easy low-interest credit are ending. That means the role of the credit card will begin to change as smart consumers begin to use credit cards more like charge cards – they pay off the balance in full at the end of each month.

What this might mean for you: Paying down your credit card balances as soon as possible is more important than ever! If you’re carrying a credit card balance, now is the time to start buckling down and wiping out that debt. If you aren’t carrying a debt on your cards, don’t start one – stick to spending less than you earn and keep using the credit card as an intelligent tool.

The credit card syndicates (Visa, Mastercard, etc.) will seek to raise interchange fees as a first line of attack. Credit cards work most effectively when lots of consumers have them and then expect this service from merchants. Think about it from Target’s perspective, for example – if half of their customers use credit cards to pay, they’re somewhat tied to offering that service to customers. Thus, I predict credit card companies will use that to their advantage and raise interchange fees, particularly on large retailers.

What this might mean for you: Many merchants will attempt to recoup this increase in interchange fees by passing the cost along to the consumer, so I would expect a slight bump in prices – 1% or so, spread out over many purchases and items. For most people, this will largely go unnoticed and will be seen as normal inflation.

Credit card issuers will get clever with fees, but annual fees won’t return. Most consumers have come to expect that their credit card will have no annual fees, so I don’t believe these will return in wide use. Instead, the companies will see other avenues for fees – cards that require a minimum number of uses per month, cards that have fees to enroll in particular rewards programs, and so on.

What this might mean for you: You’ll have to be more careful with credit card offers in the future. Also, when there are updates to your terms, you’ll need to read them carefully. Again, if you keep your balance paid, your credit will be good, so you can walk away from any cards that try to slip sneaky fees in on you.

I don’t believe rewards programs will go away. I would expect, though, that rewards programs will become more tied to specific “partner” retailers, like Target and Amazon, and away from more general programs like Drivers’ Edge. Why? Merchant-specific cards encourage loyalty to those merchants, and that has quite a bit of value to the merchants – those aren’t programs they will want to see go away.

What this might mean for you: Don’t be surprised if you find some of your rewards programs changing, particularly when your current card expires. For now, though, stick with what works for you.

Any thoughts or predictions on this new world of credit card rules?

A reader recently pointed me towards an interesting article at MSN MoneyCentral on the topic of restricting the access that teenagers have to credit cards. Much of the article discusses the proposed Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (S. 414, sponsored by Chris Dodd, and often called the Credit CARD Act of 2009), which Weston summarizes as such:

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 would forbid card issuers from opening accounts for people under 21 unless one of these criteria is met:
+ A parent, guardian or other responsible individual agrees to co-sign for the debt.
+ The applicant provides proof he or she can independently repay the debt.
+ Proof is provided that the applicant has completed a certified financial literacy course.

I understand where this bill is coming from and I agree with it in large part, but I would be opposed to it overall. Let’s look at both sides of the coin.

What I Like About the Bill
When I was a new college freshman, I signed up for a credit card in exchange for a t-shirt, then I began to use it for all kinds of stuff – video games and so on. In short, I acted like a fool with that credit card – a card I would have never had if this act had been in place.

A bill like this would unquestionably have kept me from getting into this early credit card debt. My parents would not have signed off on such a card and thus I would have been forced to learn how to manage the money from my part-time job more carefully, teaching me some valuable budgeting lessons.

I also strongly agree with the idea of basic financial literacy being a requirement for credit card use, though I’m not convinced at all that this is the way to do it.

What I Don’t Like About the Bill
What I don’t like about the bill is that it takes away personal responsibility in two different ways.

On one side of the coin is the fact that many people under the age of 21 are fully independent and have their head on their shoulders. One individual I know had a very successful business he was running himself at age nineteen. I know several others who have been through trade school and are embarking on plumbing and electrical careers at that age. Why should these independent and self-motivated individuals be required to find someone to co-sign with them for a credit card?

On the other side of the coin is the lessons learned from credit card ownership, which might actually be easier before age twenty one for many. I didn’t figure out how to use credit cards sensibly until age twenty seven, but I’ll be the first to admit that I didn’t receive a great education on how to use them and what their role should be in your life. If I had, I might have been able to make sense of my earliest credit card troubles (when I was in college) when the amount of debt wasn’t that much at all. For many people, college is a time to learn and make mistakes and grow – this bill just offers more hand-holding.

For me, the negatives of this bill outweigh the positives.

Is There A Better Solution?
The solution needed here is pretty simple – there is a desperate need for better consumer education. Consumer education should be a part of the school system from the earliest stages. Reading, writing, and arithmetic are fundamental, but so is managing your money – not knowing how to do that in the modern world can derail your life.

Instead of sponsoring bills that restrict the freedoms of adults, why not invest a bit more in education and a bit less in other areas?

What do you think? Is the Credit CARD Act of 2009 a good thing or a bad thing on the whole?

A very long time ago, I wrote an extremely brief article covering the difference between charge cards and credit cards. That article really didn’t answer the question, though, because I still have conversations and receive emails where people use the phrases “charge card” and “credit card” interchangeably.

Along those same lines, Tim writes in recently:

Am I better off using a charge card or a credit card for buying stuff?

At first, I just assumed that Tim had replaced “credit card” with “charge card” in his vocabulary and I began to answer that question, but then I realized that it’s worthwhile to distinguish between all three types of cards and their advantages and disadvantages. So let’s go through them one by one.

Credit Cards
A credit card is borrowed money. When a company issues you a credit card, you’re given a specific credit limit – the maximum amount you can borrow from the company. Each time you use the card, you borrow some amount from that company, and each month, you’re required to pay back a portion of that amount to the company. Mastercard, Visa, and Discover are the major types of credit cards.

Advantages The biggest advantage of a credit card is the flexibility. You can make purchases without actually having the cash on hand at the moment. You also have an indefinite amount of time to pay back that money, though you do have to make a minimum payment each month on what you owe. Many credit cards also have rewards programs, which return to you 2-3% of your purchase price in some form or another – often in the form of gift certificates or rewards programs. Also, good credit card use helps you to build a good credit report, which can save you money on insurance and help you with loans. Consumer protection with credit cards is usually pretty strong, too – they’ll often help you deal with fraudulent purchases and don’t leave you out to dry if you lose the card.

Disadvantages The big disadvantage is that all the flexibility is a double-edged sword. The ease of use of credit cards and the lack of pressure to pay off what you owe makes it very easy to make poor purchasing decisions. Then, when you can’t pay off the card, you usually pay a hefty amount of interest on that unpaid amount – and over a long period, that interest can be incredibly costly.

Debit Cards
A debit card, on the other hand, is linked to your checking or savings account. Each time you use the card, money is automatically taken from your checking or savings account to cover the purchase. Many debit cards have the same purchasing flexibility as credit cards, as many are accepted where Visa and Mastercard are.

Advantages You can’t get into debt trouble with a debit card. It does not allow you to buy things that you don’t have the money for. For people struggling with debt, this is a huge advantage because it keeps you out of trouble. Plus, they’re flexible and convenient for day-to-day purchases. You also don’t have to have good credit to get a debit card – you often get one with your checking account.

Disadvantages The biggest disadvantage is that you have to keep a very close eye on your account balances, because you can overdraft your account if you’re not careful. Another disadvantage is that very few debit cards have rewards programs of any kind. Debit cards often don’t have the same consumer protections that credit cards and charge cards have – if your card is stolen, your protection against unauthorized purchases can be weak.

Charge Cards
Charge cards are often confused with credit cards, but they actually function in a fairly different fashion. Like credit cards, charge cards extend credit to you from the issuer, but you’re required to pay the full balance at the end of the month. Some charge cards also have an annual membership fee. Charge cards are typically associated with American Express; many store chains often issue their own charge cards as well which can only be used at that store.

Advantages You don’t have to have the money on hand for a purchase with a charge card, nor do you run the risk of carrying a balance that will charge you interest. Many charge cards have tremendous bonus programs that go from things like 5% cash back to free companion flights on airlines – their bonus programs are typically better than bonus programs for credit cards. Charge cards often come with additional services and benefits, like free roadside assistance, free food at airports, and free hotel room upgrades. They also help your credit much as a credit card does. Most charge cards offer strong consumer protection as well, similar to that of credit cards.

Disadvantages Some charge cards have an annual fee which eats away at the benefits from using it. Also, since you are operating on credit, there is some risk that you might build up a large balance on the card that will be difficult to pay off. Many charge cards are usually pretty strict in terms of who they’re issued to – you need to have good credit before even getting one.

Which One Is Right For Me?
Many people wish to avoid credit at all costs because of the risk of debt – in that case, a debit card is obviously the right choice. If you’re seeing a great debit card (preferably one that has some semblance of a rewards program), you should investigate all of the checking options available at your local bank and also perhaps do some shopping for a new bank, particularly if you’re unhappy with your current bank for some reason.

I tend to believe that it’s worthwhile for everyone to apply for at least a single credit card and use it irregularly. It provides a very easy way to build a positive credit report and gives you some flexibility in purchasing. If you have a good rewards card (for example, I use my Citi Driver’s Edge card for all gas purchases), you can also earn multiple percentage points back in rewards.

If you have excellent credit, have a strong policy of paying your balances back in full each month on your credit card, and travel a bit, it’s worth examining some of the charge card offers available to you, particularly if you’re running a small business. Typically, one can get a big net benefit from a good charge card, but you have to be aware of the benefits alloted to you by that card. Plus, you can’t get into revolving debt trouble with a charge card since you have to pay the balance in full each month. I know at least one small business owner who makes a killing with his charge card, getting tons of free flights, free airport foods, discounts on rental cars, roadside assistance, free hotel rooms, business advice, and so on, but those are rewards that others may have difficulty maximizing.

My suggestion, if you’ve never owned a card, is to get a good checking account (I use ING’s Electric Orange as my primary checking and I’m happy with them) and use their debit card for most purchases. At the same time, get a credit card, use it for only a few purchases, and leave the card at home so you’re not tempted to use it. This allows you to start building healthy credit without the debt risks of a credit card.

Please, readers, fill in additional details you see as important – many more people than just Tim will find use with this information.

Sasha writes in with a typical question:

A lot of different personal finance bloggers have different ways that they use credit cards. Some of them don’t use them at all. Others seem to use them a lot. Where do you stand and why?

I started off answering this question for the reader mailbag, but then I realized the answer was going to be rather long and involved so I spun it off into its own post.

So, let’s break this down bit by bit.

How do you use credit cards? To put it simply, we use rewards cards for routine purchases in our life and pay off the full balance at the end of the month. If we can’t afford the purchase or haven’t budgeted for it, the credit card is not a crutch to help us purchase it.

What do you do in emergencies without the card as a crutch? We have a large emergency fund in place to deal with true emergencies – a car breaking down, a hot water heater failing, and so on. We’re able to have this emergency fund because we consistently spend far less than we earn.

Why not just use a debit card? Two reasons. First, a debit card doesn’t improve your credit score. A healthy credit score not only helps you out with things like car loans, it also reduces your insurance rates. Second, a debit card typically doesn’t provide you with any rewards for using it. Similarly, using a debit card means the money is directly pulled from your checking account, and since my wife and I have an interest checking account, we prefer to keep the cash in there so that it can earn interest before we pay the credit card bill at the end of each month.

What cards do you use? My wife and I, between us, have three active credit cards – a Citi Driver’s Edge Mastercard, an Amazon.com Visa, and a Target Visa. We use the Driver’s Edge card for gas and automotive purchases, the Amazon card for purchases on amazon.com, and the Target card for purchases from Target. This allows us to get roughly 3% back on all of our purchases on cards. These three cards take care of the vast majority of our purchasing on cards.

Don’t reward cards encourage you to spend more? No. These cards are tools, not excuses to spend more. They simply make the purchasing process more convenient (it’s easier to run a card than it is to fill out a check at the checkout) and occasionally earn us a nice reward – a 10% off card for Target, a $25 reward certificate for Amazon, or, occasionally, a check from Citi.

What’s the disadvantage of doing things this way? First of all, you have to be disciplined. If you’re tempted to buy unnecessary things simply because you have the credit to do it, this strategy won’t work. You also need to have the routine of paying your credit card bills down cold – even one late payment can wipe out the benefits of doing things this way.

To put it simply, I do not believe credit is inherently bad as some people do. I believe the big risk associated with this strategy is personal – it’s up to your organization skills and personal willpower to make it a success. I’ll be the first to admit that there was a time when I didn’t have either of those attributes – and it resulted in $17,000 in credit card debt. I had to learn how to use a card.

If you have those attributes, using a reward credit card for your routine purchases provides nothing but benefits – better credit rating, rewards, and convenience at the purchase site. For us, these benefits have been a great help over the past few years.

When I was near my financial low point, I was literally paying hundreds a month in finance charges on my credit cards. That money was an enormous burden at the time, since I didn’t have any savings built up and I was also dealing with the “startup” expenses of having a new baby in the home.

I didn’t know at the time that it’s actually not too hard to get your interest rates reduced on your credit cards, particularly if you’re in a situation like I was in. All you have to do is get your information together, call the credit card company, and be willing to play a little hardball on the phone, and you’ll often get a nice reduction in your interest rate. That will directly help your bottom line.

In fact, if I had been able to get a reduction in all of my credit cards when I was in real trouble, I would have easily saved $100 a month. That money, if used properly at the start of a financial turnaround, can make all the difference in the world. It can be the foundation of an emergency fund, light a fire under a debt repayment plan, repay a family member for a debt, and countless other little things that can make all the difference when you’re trying to turn your finances around.

Is This For You?
This tactic works best if you have a substantial amount of debt sitting on credit cards and have largely been able to make your payments up to this point. A few late payments are quite all right, but if you’re being chased by collection agencies, negotiating with the credit card companies won’t really help.

If you’re not carrying a balance on your card or don’t carry a balance regularly, the credit card company is not going to be particularly interested in helping you out because as a customer, you’re not putting much money into their coffers. Simply put, this tactic works best if you have some leverage – you’re currently paying finance charges on your card and you’re threatening to move it to another account.

Another important factor is your current interest rate. If your rate is already around 7.99% or so, there’s not much the credit card company can do to lower the rate. This tactic works best if you have a rate above 13% or so.

Remember, though, any interest rate reduction will help if you’re carrying a balance. A 1% reduction on a card where you’re carrying a $1,000 balance will save you $10 a year. If your balance is higher, you save more. If your interest rate reduction is higher, you save more. For example, if you have a $5,000 balance and get a 5% rate reduction, you’re saving $250 a year from a single phone call – well worth your while.

Preparing for the Call
While you might be tempted to just flip over your credit card and call the card issuer’s number on the back, you’ll have a much greater chance at success if you prepare just a bit in advance.

First, have a copy of your most recent statement with you. Make sure you know what your current interest rate is and also have your account number handy and easy to read. The statement should also provide you with the phone number you need to call.

Next, collect any other offers you might have available to you. See if you have any zero interest or low interest balance transfer offers available to you – in other words, check your recent “junk mail” and/or log on to your online access for your credit card and see what’s available. Get a quote on a personal loan from your local credit union’s website. These will be used as leverage to get your rate reduced.

You should also figure out a target rate to shoot for on the phone. I recommend shooting for 9.9%, but you’ll likely not get a rate that low.

Finally, get in the right mindset. Drink a glass of water. Get yourself calm (because getting worked up on the phone won’t help you), yet motivated to make this work. Then pick up the phone and dial.

Making the Call
The first thing you need to do is get someone on the phone that actually has the authority to change your interest rate. Likely, the first customer service representative that you speak to won’t be able to do that.

So, start off by navigating through their menu until you can speak to a representative. As soon as you can, ask the big question: “Do you have the authority to change my interest rate?” If the answer is no, simply ask, “May I speak to someone who can? Your supervisor, perhaps? Thank you!”

Once you’ve got a person on the phone who has the authority to change your rates, make your case as clearly and succinctly as possible. Here’s a potential script:

“Hello. Lately, I’ve been really having to stretch my finances to make the monthly payments on this credit card, and I need to reduce the interest rate somehow. It would be convenient to keep the balance on this card, but I have some other options that could really save me some money – a zero interest balance transfer offer is sitting right here, for one. Could you reduce the interest rate on my account to, say, 9.9%?”

This puts the ball firmly in their court – and at that point, it’s largely out of your hands. The typical response is a reduction in rate, but not a reduction all the way down to the rate you requested.

Regardless of what you get out of the call, be polite. Say “thank you” for any rate reduction and don’t get enraged if you don’t immediately get a big reduction.

Other Options
Sometimes, you’ll get a rate reduction that makes you happy. At other times, you may not get much of a rate reduction at all – and in that case, you’ll want to do something else. Here are some options.

Seek out balance transfer offers. Moving your balance to another card can help get the finance charge monkey off your back – a useful short term solution.

Seek out another type of debt. Investigate getting a personal loan at your local credit union. A home equity loan is a possibility, but it’s generally a poor idea to change unsecured debt (like your credit card) to secured debt (like a home equity loan).

Lower the offending debt rapidly. Focus all your energies on getting rid of that high interest debt as fast as you can. You might want to work a second job, sell some stuff, or start a side business to generate extra money – and learning how to live cheaper is always a big plus.

For most people with credit card debt, the possibility of success (and the savings that go along with it) with attempting to get your rate reduced is worth the effort involved in picking up the phone and doing it. Good luck!

This week, The Simple Dollar is taking a deeper look at five common personal finance debates.

Several people I know have made the active choice in their life to completely avoid the use of credit cards.

In the modern era, this seems like an almost shocking choice. Credit cards seem like the foundation of basic money management. We use our plastic everywhere as a matter of course, a fundamental part of how we do things like buy groceries and household goods and make other purchases.

Yet it’s a lifestyle choice that many make, and it’s actually not as difficult as it sounds. Over at No Credit Needed, there’s a great explanation of how one guy gets by using just cash and his debit card, no credit at all.

Is this a reasonable lifestyle choice, or is it just foolishness? Let’s take a look.

What Are The Options?
Credit card users are in the clear majority here. NewsHour reports that in 2001, 76% of Americans had at least one credit card to their name, and that number has certainly increased since then. Many credit card owners use their cards responsibly but frequently, taking advantage of the buyer protections offered by credit cards and the convenience of using them to facilitate day to day purchases. I know I’m certainly in that camp.

So what do the rest do? No Credit Needed explains things very clearly: a mix of electronic transfers, debit card usage, checks, and cash use. Coupled with a clear budget, this enables people following this kind of system to never “accidentally” slip into credit card debt – it provides a nice barrier of protection.

What Are The Big Differences?
The biggest difference between the two perspectives rests in the functional differences between a debit card and a credit card. A credit card tends to offer significant buyer protections and allows you to make any purchases you like up to your credit limit, but that’s a double-edged sword – you have a bill to pay, after all. A debit card may or may not offer buyer protections (you’ll have to talk to your bank to find out) and your limit is effectively the balance of your checking account, since any purchases on a debit card are directly pulled from there. There’s no bills at the end of the month, though, and the only danger is overdrafting.

So What Should I Do?
First of all, regardless on your feelings on the use of credit for regular purchases, it’s worthwhile to get a credit card. Establishing a positive credit history can only help you in life – it helps with insurance rates, the interest rates you might get on car loans and mortgages, and so on. If you object to using credit, just get the card, register it, put it back in the envelope, put it in a safe place, and forget about it.

Now, what about the use of credit cards in day to day purchases? I think it really comes down to psychology – do credit cards create a psychological temptation to spend more than you should or perhaps create a feeling of unease and a lack of trust in your own spending habits? If credit cards trigger either of these responses from you, then you’re likely better off not using one, because the concept of using a credit card is inherently altering your spending. Again, No Credit Needed explains it rather well – his debt was out of control and it was clear to him that access to such easy credit was a big part of the problem.

I think a period of “credit abstinence” is actually useful for many people, as it provides an opportunity to re-evaluate your priorities without an increase in your debt load. However, the convenience, buyer protections, and rewards of credit card use make it a valuable tool if you use it wisely – don’t carry forward balances, avoid “accidentally” being late, and so on.