Should You Consider Abandoning a Credit Card?
If you are worried about the on-time credit card payments due to job loss, layoffs, or cutbacks in income, you may be asking yourself if you should take advantage of one of the credit card opt-out programs that many lenders offer during the coronavirus pandemic.
Deferring your credit card payment allows you to defer your monthly credit card payment for a specified period of time without charging late fees, activating a default interest, or lowering your credit score.
However, just because patience is an option does not mean that it is the best option. Here are the pros and cons to consider before making a decision:
Plus: more money in your wallet right now
The biggest benefit of not using a credit card is that it frees up cash that you might otherwise have set aside for your monthly credit card payment. If you’re weighing which credit card bills to prioritize and aren’t sure if you have enough money for rent or groceries at the end of the month, being able to reserve an extra hundred dollars to cover your day-to-day expenses can make a huge difference.
Cons: more interest to pay off later
The biggest disadvantage of a credit card withdrawal is that your balance continues to pay interest even during the withdrawal period. Remember, credit card interest adds up – so if you don’t pay off your balance this month, the interest you charge during your current billing cycle is added to your total balance, increasing the amount of interest charged to you in the next month. billing cycle (and so on).
If you continue to shop with your credit card while it is on hold, your balance – and the associated interest – will rise even faster.
Plus: missed payments won’t affect your credit score.
According to the FICO credit scoring model, 35 percent of your credit score is based on your payment history. In general, an accidental missed payment won’t hurt your score much (and if you’ve never missed a payment before, you should call your lender, explain the situation, and ask them to remove the negative entry from your credit history), but if you miss a few credit card payments, your credit score will begin to reflect this behavior.
Under the abstinence model, your missed payments are not credited to you. This means your credit score won’t drop just because you missed a few payments.
Cons: your credit rating may still be reduced
According to the FICO, 30 percent of your credit rating is based on “amounts owed.” If the amount of money you owe on various credit cards increases, your credit score goes down – and yes, that amount includes both the outstanding balance and outstanding interest. (Ultimately, unpaid interest is added to your balance.)
This means that your credit score can still suffer during abstinence, especially if you add new payments to your card without paying off the existing balance.
Ultimately, the decision of whether to request a deferred credit card payment comes down to the value of having the extra money now versus the cost of paying the higher balance later. Yes, your credit score may drop slightly due to the increase in credit card balances, but the real question you have to ask yourself is whether you will be financially prepared to pay back your credit cards after the abstinence period ends. Your minimum monthly payments may be slightly higher, for example, depending on how much your balance grows during the abstinence period. Will you have enough money to cover these increased payments? Can you make more minimum payments and start getting rid of credit card debt?
Many of us are currently experiencing some degree of financial uncertainty, so you may not be able to provide good answers to any of these questions yet, but it’s important to keep them in mind when deciding whether to push for a credit card ditch. program. Every dollar you charge from your credit card must be repaid at some point, almost always with interest (unless you choose to go bankrupt, which has its pros and cons). With indulgence as an option, you can choose whether it is better to make these payments now or postpone them for a few months. Just make sure you make this choice with your eyes open.