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Is Ditching Your Credit Cards Wise?

Paper or plastic? The latest studies show many consumers are putting away their credit cards and relying more on cash. Conventional wisdom says that's the thing to do. But is it always? In this column, "Early Show" financial contributor Ray Martin has the lowdown, and points out that always using cash may not always be advisable. It could hurt your credit rating, and has other issues. So, he suggests, don't just dump credit cards willy-nilly.
TO TOSS, OR NOT TO TOSS: THAT IS THE QUESTION

The average consumer has about five credit cards. Since the first charge card was issued in 1958, credit card use has surged. In 2008, the average credit card debt for card-using households reached over $10,600.

Credit Card Use Declines

But consumers' reliance on credit cards appears to be at a turning point. According to data released by the Federal Reserve Bpoard, credit use is slowing. Revolving credit -- which is mostly credit card debt -- fell by about 20 percent late last year. That was the largest drop on record, according the Fed. Also, through October 2009, the number of credit cards issued was down 46 percent from the same period in 2008, according to Equifax.

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It appears that more folks are in pay-down mode and are making the decision to go without using or even keeping any credit cards at all. According to reports across the country, the reasons for that are no surprise: People are fed up with high fees, credit card cancellations and restrictions. There is also a general distrust of credit card companies and their gimmicks. Then, there's the other reason: After having their confidence shaken by a deep and long recession, there is a strong reluctance to get into debt, because consumers fear they will struggle financially to get out.

Debit and Cash Are King

Many folks are turning away from using credit cards and are choosing to pay with debit cards, checks and cash. According to a consulting group survey last year, 28 percent of consumers shifted the way they pay for purchases with an increase in debit cards and a decrease in credit card usage. Almost half of consumers surveyed said they believed debit cards helped control their spending.

It's hard to argue with someone who decides to stop using a credit card. I say more power to you! But if you decide to ditch your card, know what you could be giving up and be prepared to deal with the limitations and risks of using other forms of payment. Here are a few things to consider:

• Transaction Protection: When you make a purchase with a credit card, there is a firewall between your bank account and the vendor. The bank issuing the credit card makes the payment to the vendor. You are obligated to pay the bank only after you are in agreement that the charge is legit and that the item or service you bought was delivered as agreed. But make a transaction with a debit card, and the payment is immediately deducted from YOUR bank account. Federal laws and banks' policies include protections from fraudulent or unauthorized transactions due to debit card theft. But before a questionable transaction is sorted out, the money is taken from your bank account. In the meantime, if your account is depleted because of this, any checks written could bounce.

In a real-life story, here is an example of this important feature: A person paid for furniture from a furniture business in another state. She used her credit card. After several weeks passed, the furniture hadn't arrived. She called the store and learned that, as a result of financial difficulties, the business had filed for bankruptcy. Since she used her credit card and never received the furniture, she disputed the charge and it was removed from her account. But if she had paid by check, she would have had to file a claim as a general creditor, and would have had to wait for a refund of her money. Depending on the bankruptcy laws and process of the other state, she may have waited a long time and only received a part of what she paid!

• Credit Rating: Responsible use of credit cards is one of the most effective ways to build a good credit record. Consumers who don't carry a credit card have an average credit score of 563, as opposed to 689 for those with at least one card who carry a monthly balance, according to Credit Karma, a consumer Web site that provides free credit scores. The numbers were were based on TransUnion credit scores. The fact is, many folks will need credit when it comes time to buy a house or a car. So you want to have a good credit history and score. And you can only get them by having some responsible usage of credit. According to credit experts, debit cards -- which are simply a card substitute for paying by check -- have zero impact on your credit score.

• Convenience: Also, it can be difficult to rent a car without a credit card. Some hotels may not book a reservation on a debit card, and those that do often place a hold of several hundred dollars, which freezes that money in your bank account, making your available balance lower, which can cause incoming checks to bounce.

• Benefits and Rewards: Finally, there are the additional befits and rewards programs that come with credit cards, which include frequent flyer miles, gift card rewards, college savings and other programs. Some credit cards provide good rates on foreign currency conversions, so are a good option to use when traveling in a foreign country. Many credit cards also double the manufacturer's warranty when the item is purchased on the card, making credit cards a good payment option when buying and shipping gifts in the consumer electronics category.

But when folks get into credit card debt and cannot pay off their balances in a very short period of time, the fees and interest they pay will almost always outweigh these rewards and benefits.

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