Want to know what happens when you close your credit card accounts? Tired of reading the theoretical ‘rules of the FICO score’ and want to see what really happens? It’s your lucky day. I am going to show what happens to your credit score when you decide to close all of your credit cards and choose a life of freedom, a life without debt. This is not a theoretical activity or a ‘what-if’, this is something I consciously chose to do. In July 2018 I had approximately $102,000 of available credit. By the 1st week of August 2018, all accounts were closed. Here’s what happen to my credit score as of January 2019.
I closed all 5 of my credit cards to see what happens to my 800 credit score. Am I crazy? Maybe, but with 8/10 Americans living pay check to pay check and unable to afford the next $500 emergency, I’ve come to realization that what we’re doing, what the typical american is doing, what I’ve been doing, just isn’t working. There are 3 core ideas which drove me to this decision:
1. Credit cards are the cigarettes of the financial services industry. 2. Credit cards keep poor people poor. 3. Credit cards keep the middle class from climbing the economic ladder.
Point redemption is a joke and not a vehicle to wealth creation. Point redemption on most cards is ONE PERCENT OF ONE DOLLAR. Do you know what that means? You need to spend $10,000 to earn $1,000. Even at 2%, 3%…5%, the economics of point redemption do not produce a positive reward. Have you ever met a millionaire who said “gosh, the reason I became rich is because of my visa points!”? Exactly.
You spend more money when you use your credit card
Your 5% cash back doesn’t matter. Human beings, on average, spend more money when paying with credit vs cash. This is a fact. One of the most often cited studies is one conducted by Dun & Bradstreet, where the company found that people spend 12–18% more when using credit cards instead of cash. McDonald’s reports its average ticket is $7 when people use credit cards versus $4.50 for cash. So we spend 12% to 18% more to earn 5% cash back? You’re not winning, i’m not winning, no one is winning with credit cards. The only people who are winning are Visa, Mastercard and American Express.
- Americans have in aggregate $830 billion of credit card debt, that’s $8,161 per household
- 20% of Americans have more in credit card debt than in retirement
Do you think it’s possible to live a life without credit cards, but you’re scared to take the leap? Keep reading.
Okay, now what?
In an earlier story, I published personal stats of how I have an 800 credit score…with $170,00 of student loan debt. Credit cards, and the FICO system are not a measurement of wealth, financial success, or economic independence. Credit cards and the FICO system measure your ability to borrow debt, and pay it back.
Why do we want a high FICO score? So we can borrow money. Why do we want to borrow money? So we can have a high FICO score. Why do we want a high FICO score? So we can borrow money. This my friends, is the rat race of credit card debt, and my 800 credit score is the carrot:
What happen to my FICO score when I closed my credit cards?
Let me preface this by saying, closing your credit cards is hard. I had to call each bank 1 by 1, and explain to no fewer than 3 people per bank that I was adamant about closing my account. Each call required multiple escalations. American Express even said:
“JR you are making a huge mistake by closing this $33,000 line of credit”.
My local credit union, wouldn’t even let me close the account over the phone. I had to drive to their HQ, get a certified letter, and speak to the branch manager. Who said (im quoting):
“JR you’ve had this credit card for 13 years, you’re making a big mistake by closing this account”.
I laughed and said, “the only path to financial freedom is one without credit”. He promptly closed the account and we wished each other good luck. Fast forward to December 2018, with $0 in available credit, living a cash only budget, with a small emergency fund — my FICO score went from 800 to 764.
To understand *why* my score went down 36 points, I pulled a credit report from www.annualcreditreport.com (this is the only free credit report web site on the internet, authorized by the federal government. Everything else is private, costs $$ and is for-profit).
Here’s what I found:
With my student loans accruing interest at an approximate rate of $27/day, the interest capitalized to the principal produced a total balance *higher* than the original loan amount. The net of this is a debt-to-credit ratio > 100%. With a high debt-to-credit ratio, your FICO score drops — mine certainly did. Quite frankly, I don’t care that my debt-to-credit ratio is > 100% because I am on track to pay off $170,000 of student loan debt by the end of 2019. My ultimate goal is to have an ‘indeterminable’ credit score.
How to survive a life without credit cards
The thought of living without credit cards was quite worry-some before I took the plunge, but 6 months in — i’m still alive, contributing to society, eating and paying bills, but now with cash, and I feel great. Here’s a couple tips i’ve learned on surviving without credit.
1. How to handle an emergency
Aspirationally, set a goal to have cash-based emergency fund of atleast $1,000. Using credit cards when its an emergency is the absolute worst time to use a credit card because you’re already not thinking clearly and the decisions you make will have financial implications for years to come. A few weeks ago, my french bulldog had an emergency which ended up costing me nearly $13,000.you can read about it here:
The old me would have dropped my amex and went on a payment plan for 36 months. The new me, realizing credit cards are inhibitors, not enablers to wealth creation, built an emergency fund…for emergencies. I used my emergency fund to pay for the $13,000 bill. You should have an emergency fund, it doesn’t need to be $13,000 but it needs to be big enough to give you a sense of comfort as you a take leap to life without credit. Guys…the feeling I had when paying cash for an emergency and not having to ask myself ‘ f*ck how am I going to pay this off?”, is amazing.
Renting cars or staying at hotel
This is probably the lamest excuse i’ve heard from all of my friends and colleagues. You can rent a car using your VISA/MC debit card, and you can also use your debit card to stay at a hotel. I know this because between July and December i’ve rented a car from hertz, and stayed marriott/SPG hotels approximately 16 times (I travel for work). All of which gladly accepted my debit card. The only implication is that Hertz, Marriott and others will put a cash hold on your debit card depending on the duration of the rental. For me, it was anywhere between $60 and $600 dollars.
Did I die? No. Because I have an emergency fund and follow zero-based-budgeting (post on that soon) to plan my expenses for the month ahead.
“But JR, the hotel put a $600 hold on my debit card!! I can’t afford that” .
The cold truth is that if you can’t afford a $600 debit hold for a hotel, you can’t afford stay at that hotel or go on vacation.
Pay with cash
I’ve actually embraced the philosophy of envelope-based budgeting where all of my discretionary spending is allocated into a system of 3 envelopes.
1. My fun money 2. Groceries 3. Restaurants
I allocate a % of my post-tax income into those 3 envelopes, and when I run out of money in that envelope — I stop spending money. Crazy isn’t it? All automatic/recurring bills (mortgage, utilities, etc) remain as an auto-expense from my bank account. This process has made me more aware of my spending patterns, and the net result is that I spend approximately 30–50% less on discretionary activities when using cash vs credit.
What about you?
Do you think you can live a life without credit cards? Make a conscious decision and leave the credit rat-race, your FICO score isn’t worth it. As we enter 2019, I challenge you to embrace a life without credit card debt, a life of living within in your means, a life of spending less than what you make, and a life of freedom — by saying no to credit cards.