Should I cut up my credit cards?

My brother and I were talking this week about the virtues vs. vices of credit cards. Banks are in the business of getting us to open new cards and use cards more. But are banks to blame for our poor spending habits? Are credit cards the enemy?

Some financial gurus advise cutting up your credit cards so you won’t be tempted to use them. Or freezing your cards in a block of ice and keeping them in your freezer. The theory behind the freezer strategy is that you’ll have time to reconsider the necessity of a purchase if you have to wait for the block of ice to thaw before you can use the card. Maybe these extreme measures are necessary if you have an extreme case.

Maybe these methods work to prevent some people from overspending. My viewpoint is that these are band-aid approaches. They will work temporarily. Hopefully you get used to not spending money unwisely. Without addressing the real underlying issues though, you risk backsliding. More than likely, you’ll go back to old habits when you hit a rough patch in life.

Spending is often a habit. To break a habit you need to figure out what sparks the negative action. You need to examine the trigger, the response and the reward. Maybe your spending habit is triggered by a hard week at the office. At the end of a hard week you go out and buy new shoes and a purse. And probably dinner out. I’m not judging…merely observing. The reward you receive by taking action(buying stuff) is a feeling of wealth. The new shoes and purse may give a feeling of being more attractive. These purchases are all fine if they were conscious decisions and goals you had. HOWEVER, if your goal was to build wealth but you headed to the mall out of habit at the end of the week then you need to shift.

Knowing your trigger is a hard week at work, go ahead and schedule a Friday night/Saturday routine. That is, rewire the actions that will take place when the trigger hits. You want the actions to give you the rewards of feeling wealthy and attractive. An alternative routine could be a financial update and a physical activity that you enjoy. The financial update (looking at your new balance in Quicken or Mint after your paycheck is deposited) will remind you that you are wealthier. Pick a physical activity you enjoy like taking a walk with a friend or working out at the gym. You’ll feel more attractive than eating a big meal at Texas Roadhouse after a long week.

Again, find your trigger, replace the unwanted action and still receive the reward. You can’t actually quit most habits. Only replace them. For more on habits, check out Charles Duhigg’s excellent book The Power Of Habit. He describes habit loops in much more detail and includes case studies of successful habit changes.

After kicking your bad spending habits you’ll be able to enjoy the positive benefits of credit cards with complete peace of mind. I use credit cards for every expense I can. Credit cards are very convenient. A lot of times I don’t even carry cash.

Convenience isn’t the only reason I prefer credit cards. Probably not even the primary reason. The big one for me is the points. I use a Discover card and a Mastercard that earn points for each purchase. One point for each dollar in purchases. At times they run different promotions. For example, this month every dollar in online purchases using the Discover card earns five points. Yay!! Amazon gets a lot of my dollars every month. I devour books. And now I get my vitamins, pens, protein powder, all sorts of things from Amazon. Anyway, the points work out to 1%– 5% discount that you can apply back to your card.

I know you’re thinking 1% isn’t worth messing with. Here’s how it works for me. We spend around $1,700 per month on the credit cards. We put utilities, insurance, everything we can on the cards. That works out to $17 at 1%. ($17 x 12 months = $204.) $204 refund from purchases we are going to make anyway. Maybe $204 doesn’t matter to you. If so, you’re probably spending more than $1,700 and would get more than $17 a month. =)

Another tactic with the credit card points is to purchase gift cards. A few years ago, LL Bean was one of the vendors that Discover offered gift cards for. The way it worked was that you could use $40 worth of points for a $50 gift card. That is 20% off. LL Bean had a kayak that I wanted. So I saved up points and bought enough gift cards with points to get the kayak. It was a great kayak. I used it so much that I wore a hole in the bottom. Every time I used it, I was reminded of how I got it essentially free. Discover, Amex, Citi and others have many vendors that participate in the discounted gift cards in exchange for points program.

The overarching key to credit cards (and life) is that I’ve learned to not spend more than I can pay for each month. Whether I pay by credit card or cash, I limit my spending.

Having mastered my spending habits, I’ve found that credit cards can be a tool to actually save money. I am able to be even more frugal thanks to credit card reward points. For me, credit cards are my friends, not the enemy. I challenge you to let them out of the freezer and take responsibility for your habits.