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10 Steps to Break the Credit Card Habit

This article was written by in Best Of, Credit. 12 comments.

If you’re a Type A credit card user, chances are you know it whether or not you are willing to admit it. If you can answer yes to these questions, then a lifestyle change is in order.

  • Do you pay interest fees when you send in your credit card payment?
  • Have you ever paid your credit card late because you didn’t have the money for the payment?
  • Do you use your credit card when you don’t have enough cash?
  • When your issuer raises your credit limit, do you spend more because you can?

Type A credit card users are loved by the issuers. They pay interest and late fees. Between that income and the interchange fee the cards charge the merchants for each transaction, the card issuers’ business plan is to get Type A credit card users to spend more.

On the other hand, Type B users, who don’t pay interest or fees, are shifted to cards with higher interchange fees. For example, Citi switched me from a Dividend Platinum MasterCard to a Dividend World MasterCard. The main difference between the two cards is the RFID chip that allows transactions without physical contact, but the hidden difference is the higher charge merchants pay to accept the card. (Also, like the larger trend in the credit card industry, the cash back rewards have been reduced.)

If you’re a Type A user, then it would be in your best financial interest to stop using your credit card, to budget your income, and use cash. While some people can take that advice and get it done, others have built up a psychological dependency on credit cards. Here are 10 steps to break the cycle of dependency.

1. Look at your spending carefully.

Deep down, some know that they are spending more than they are earning and wasting money on interest fees. This fact is ignored at the conscious level; ignorance is bliss. Use software like Quicken, Microsoft Money, Excel, or even a pen and paper to track all your spending for a month, even the quick daily cafe mocha at Starbucks.

Use your credit card statements to compare with what you have recorded. Did you track everything?

This might reveal incredible, depressing detail about your spending. $100 a month at Starbucks or $400 for dining out are not out of the ordinary when looking at these numbers for the first time.

If you continue this for more than a month, you might see your bottom line, or net worth, declining each month. This is not a good sign, and it may be enough to encourage you to change your behavior for a better chance of financials success.

2. Understand marketing.

Society doesn’t want you to curb your spending. Products and advertising are designed to make you believe you need something when you don’t. Even the government encourages spending, especially when trying to boost the economy. President Bush would be ecstatic if everyone took their economic stimulus payment and loaded up on American-made goods.

It’s hard to maintain control when the rest of the world is against you. The sooner you understand that it takes effort to defy the prevailing trend, the closer you will be to being above the influence of marketing.

Being completely above the influence is impossible unless you disassociate yourself from “civilized” society. Accept the fact that powerful forces in the world are trying to manipulate your behavior, and accept the fact that with extensive research they are mostly successful. With this realization comes enough power to resist a portion of those marketing efforts.

3. Commit yourself to change.

You can only change your behavior if you want to change your behavior. A smoker can be told repeatedly that there’s a good chance her lifespan will be shortened and may face halth consequences like emphysema or cancer, but unless she’s ready to quit, all the words in the world would have no effect. Logic and reason often play small roles in human decision-making.

For those with debt accumulation, the problem isn’t the credit card. Credit cards are just tools, but they enable people to spend money they don’t have. If you’re ready to break the credit card habit, understand that there’s a deeper problem to solve. Without credit cards, the most accessible facility for overspending will be removed, and that can be the first step to solving the deeper problem of overspending. That is, of course, if you’re ready to admit there’s a problem and commit to changing it.

Steps 1 and 2 above may help you get to the point at which you’re ready to commit to changing your behavior. Committing to this change means spending less than you earn. You should be familiar with the details behind your income an expenses and have the knowledge to determine where there are opportunities for cutting back your spending and increasing your income.

If you use the credit card for spending more than you have, then you will need to cut back immediately.

4. Consolidate your balances onto one or two cards.

Gather the latest statements for the cards containing balances. Choose one or two with the lowest interest rates and consolidate your balances onto these cards. By calling the credit card company, you can provide the information for your other cards with balances and they will initiate a balance transfer. Ask for a transfer fee waiver. If they aren’t willing to waive the balance transfer fee, consder using a different card to consolidate your balance.

5. Enact a cash-only policy.

Once you consolidate your balances onto one or two cards, you cannot use those cards for spending. You have two options for spending from this point forward: cash or debit. I suggest cash because spending with a debit card can be psychologically similar to spending with a credit card. In order to kick the overspending habit, changing the way you think about financial transactions is important.

While there is a logical difference between spending with credit cards and with debit cards — debit cards are linked to your checking account so you can only spend what you have — if humans were logical they wouldn’t be in debt.

Actually, now many banks allow you to overspend (overdraw your account) with your debit card. Additionally, they charge a somtimes hefty fee for this “priviledge.” If you want to change your behavior, cash-only is the best policy. An empty wallet is a great spending barrier.

6. Destroy your credit cards except for one or two.

Forget all the talk that says closing your credit cards will damage your credit score. Overspending is a larger problem than getting a more favorable rate on your next mortgage. I would suggest canceling almost all of your credit cards. Why not all? While some people might have good results with the “cold turkey” approach, I don’t believe it should be a universal recommendation.

Here’s the proper way to destroy your cards. First, get your free credit report from, the official site that will provide you with your three free reports each year. Inspect the report carefully taking note of every credit card listed. See some unfamiliar cards? Chances are your report contains information on cards you didn’t know you had.

If that’s true, first confirm that these cards are in fact yours. If someone is using your identity to open credit cards, this must be resolves as soon as possible. There’s also the possibility that the credit reporing agency has bad information. Clear any errors quickly by contacting the company that provided you with the credit report, like Experian, Transunion, or Equifax, and disputing the incorrect information.

Next, call the credit card companies for which you do not have your card and cancel your accounts with them. If you don’t have the card, you didn’t even know you were a customer. There’s no sense in keeping a credit line open if you didn’t know you had one and if you’ve survived thus far without needing it. The plan is to reduce your spending, so the simple solution is simply canceling the cards you haven’t been using.

If you consolidated your balances as suggested in step 4, you should have one or two cards with balances and more without. Here’s the dirty secret about consolidation. Now that your your balance is all on one or to cards, your combined minimum payment is probably lower than it was before. Don’t forget to pay at least the minimum to each card, but we’ll tackle paying down the balance aggressively at a later point.

Cancel all the cards not containing balances. As I mentioned above, this is not the savviest approach if you are concerned about your credit score. If you have an overspending habit enabled by easy access to credit, you are not concerned with your credit score. Keep your oldest card if you expect to be applying for a mortgage in the near future, but otherwise, stick with the lowest interest rate.

To cancel your accounts, you have to call the companies. The representative on the phone will try to keep you as customer by offering you lower rates and higher limits. Don’t bother negotiating, even if they offer a lower rate than the card you are saving. The idea here is to simplify, so don’t play any games.

Shred all the now-unused plastic. If you don’t have a shredder that handles credit cards, use a pair of scissors to slice the cards into several pieces. I would even discard of the pieces in different locations.

7. Lock away your remaining credit card.

Now that you have one credit card left, realize that you will not be using this card for everyday spending; for now, cash is king. Put your remaining credit card out of sight. Lock it away. I’ve even heard of some people who put their credit card into a cup of water in the freezer. The extra step of breaking a block of ice to get to your credit may be an extra demotivator.

This final credit card can be used in extreme emergencies until the next step is complete.

8. Build an emerency fund.

This step will take some time. If you have an overspending habit, you’re spending more than you earn. That creates a situation that prevents saving. In step 1 you evaluated your spening. Perhaps you cae across some options for cutting back, allowing you to put money into a short-term savings account.

Open up a high-yield savings account. Many, like ING Direct, allow you to set up direct deposit or an automatic investment plan. Choose one or the other, which ever is the best for you. It’s simpler if you already have a pay check deposited somewhere else to go with the automatic investment plan.

The goal is to save 3 to 6 months of your expenses in this savings account. This could take a long time if your expenses apprach or exceed your income. You’ll have to be creative. If skipping this year’s vacation would help you achieve this goal, then you have a decision to make.

Remember: an emergency fund is to be used in true emergencies only. This doesn’t take the place of your credit card. Te purpose of the emergency fund is to remain untouched for regular expenses but accesible when major spending is required. Some examples might be the loss of a job or a significant medical expense.

For more details, see Five Components of an Emergency Plan, but ignore component number four.

9. Pay down your balances.

While you’re building your emergency fund and paying cash for all your expenses, don’t forget to spend money every month to your consolidated credit card balance. In order to get out of debt, you’ll probably have to pay more than the minimum. There are several theories prescribing the best way to divert all available funds to paying down your debt.

A popular financial guru, Dave Ramsey, suggests what he calls the “Snowball Method.” He suggests ordering your balances (you should only have two at the most at this point) from highest to lowest. To the card with the highest balance, pay the minimum each month. To the card with the lowest balance, send the minimum payment plus any additional funds you have available. Dave believes this will allow you to see success (paying off the first card) sooner, providing a psychological boost, encouraging you to continue.

While psychology plays a large part in terms of money, I believe Dave’s reasoning is faulty. If you put the most money towards the card with the highest interest rate, you might not get the psychological boost of paying off a card sooner, and the time difference may be negligible. You will have a psychological boost from knowing that you will be paying less interest.

For more information, read about the Debt Avalanche, a better snowball method.

10. Check your progress monthly.

If you use financial software mentioned above, you’ll have a straightforward way of measuring your progress. You should see your expenses decreasing each month and your credit card balances decreasing. These monthly reports can be excellent motivation to continue. Your habit is clear in graph form; visuals are powerful. Each month, recommit to spending only what you have.

When changing a behavioral pattern like overspending, don’t expect immediate success. Our society encourages consumerism, and breaking from that trend, like swimming against the current, is going to be difficult. We often do not see the consequences of overspending. We hear about the government bailing out banks for making bad lending decisions and creating laws to protect consumers who purchased houses too expensive.

Don’t let this distract you. In most cases, the consequences a pattern of overspending can be difficult on relationships as well as personal finances. Once you’re ready to change, make the commitment and follow the steps above. Success will come through sticking to the plan.

Updated February 6, 2012 and originally published April 7, 2008.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter.

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{ 12 comments… read them below or add one }

avatar 1 Anonymous

Correct on all points.

Just in case someone reading this post still needs some convincing that they should break their credit card habit, I suggest they take a look at this post about the credit card industry’s “trips and traps” to keep them in debt: link

I believe you will come back here after reading it and implement this 10 step plan ASAP.

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avatar 2 Anonymous

I’d have to agree with Dave’s version of the snowball, just because I’ve tried it both ways and having a $0 balance was much more of an incentive to keep going than “Oh, look how much interest I saved on this huge balance I still have left!” Putting a chunk of money toward the high interest balance and seeing barely a blip in my total amount due was very defeating. But everyone’s brain works differently. :)

I’d also reinforce what you mention in the Debt Avalanche – 3 to 6 months expenses in the e-fund is ideal, but start with $1000 and focus on paying off the debt, especially since the interest rate on your savings account is probably less than the ones on your credit cards.

And it’s dangerous to ignore your credit score *too* much, just because it can effect everything from getting a job to finding an apartment to rent. Destroy the extra cards, definitely – but I’d be wary of closing them unless the ratios of available credit to credit used on the lower-rate were extremely low. And that could be one more psychological blow, to do the “responsible” thing and see your score plummet.

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avatar 3 Anonymous

Good article. I began as a type B, then changed to type A, and finally came to the point where I will not use credit. There are rare exceptions, like when a department store will give a discount for using its card. I’d rather pay outright, but will use the card and pay it off immediately. I rarely use cash, preferring debit cards.

As far as how best to destroy the credit cards, this looks like the best way to me: link You don’t even have to find different disposal places for the pieces!

Well, the idea is good, but I don’t endorse the product ;)

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avatar 4 Anonymous

“On the other hand, Type B users, who don’t pay interest or fees, are shifted to cards with higher interchange fees.”

I’ve always been type B, never paid a penny in interest, but as of yet nobody switched me to another type of card as far as I know. The only thing that came close was a recent letter from AmEx with an application for a different card – the one that simply requires payment in full each month – “just right for you”, in addition to the one I have. The letter claimed having this card will “increase my flexibility”. Sounds fine – since I pay in full anyway, what is the difference, right? Oh, but there is a catch – after 1st year this new card has $150 yearly fee. Needless to say I shredded the new application. But they didn’t take away my free cashback card, they just wanted to steer me towards their other card I suppose.

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avatar 5 Anonymous

Great advice-

Credit card companies today are nothing more than loan sharks. As the current credit crunch moves into unsecured debit credit card companies will pay a price but the consumer will again take it on the nose.

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avatar 6 Anonymous

I like your suggestions. I’ve enacted most of them. I’m making measurable progress using these ideas. I’m still taking a few steps forward and one or two backward, but this really can work.

Remember, if you don’t have the card in your wallet it is impossible to use it!

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avatar 7 Anonymous

Great advice! Unfortunately, I was so a “Type A” user. Your right it’s a psychological habit that you have to break. I’d add one suggestion: some form of accountability. Having a blog where I post all my spending is really forcing me to stay on track!

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avatar 8 Anonymous

Good consolidation of ideas. For my life Ive swung pretty wildly back and forth between type A and type B. ..which I think is the story for a lot of people.

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avatar 9 Anonymous

I had never heard about credit card companies moving people to higher transaction fee cards if they weren’t making money with them. I have noticed that my rewards points are only worth about half of what the use to be.

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avatar 10 Anonymous

Wonderful post! I’m less than $3,000 away from my goal of no CC debt, and I’m getting more excited every day. I locked away my credit card, and this has helped; in the past, I’ve promised myself that I would pay off the card, and then just used it again and again, for ‘little’ things. Well, those little things add up!

I used to be an ‘A’, now moving to a ‘B’!

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avatar 11 Anonymous

I know when I first received a credit card I was a type A user. After years of making the credit card compaines rich I have learned better. You make some great post.

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avatar 12 Anonymous

Breaking the credit card habit is a hard habit to break especially if you have no sense of money. When people get in to deep with debt it’s very hard to get out.

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