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Related topics: credit, credit cards, emergency fund, credit rating, Liz Weston

More than 8 million people stopped using their credit cards last year, according to a TransUnion analysis. If you're one of the people who voluntarily stopped using credit, you might want to rethink that decision.

First, some background. The ranks of U.S. residents who didn't have or didn't use a general-purpose bank-issued credit card swelled from more than 70 million in 2009 to about 80 million in 2010, There are several factors driving this trend:

  • Some cardholders were cut off. Credit card issuers lowered credit limits, shut down inactive accounts and closed accounts with delinquent balances in what are known as charge-offs. (Much of the drop in credit card debt seen since the start of the financial crisis is due to charge-offs.)
  • Some were ticked off. All the limit cutting and rate raising made a lot of people justifiably cranky, and some vowed to stop using credit cards.
  • Some just soured on credit cards. Many people prefer the discipline of using debit cards or cash to manage their spending, particularly in these tough economic times.

I'm all for responsible spending and a big hater of credit card debt. If you're one of those people who literally cannot control his or her spending and would go nuts with an open-ended credit card, then I salute your decision to go on a cash-only basis.

Liz  Weston

Liz Weston

Most people, though, can learn to responsibly handle credit cards. "Responsibly" means charging only as much as you can pay off in full every month, and then doing so -- each and every month. Carrying a balance is just dumb.

Why bother with credit cards? There are plenty of reasons to have and use plastic, including:

  • Credit cards help your credit scores. You don't need to carry a balance to improve your scores, and you don't want to use more than a small portion of your credit limits (30% is good, 10% or less is better). But having and using a major credit card or two can help you rehabilitate troubled credit scores and keep good scores high. Good scores help you get good rates on major loans and lower rates on insurance, in addition to access to the best credit card rewards programs. Debit card use doesn't help your scores, and neither does cash.
  • Credit cards offer consumer protections. If you have a dispute with a retailer or service provider, your card issuer acts as a middleman to help you either get what you paid for or get a refund. Many cards offer other perks, including purchase protection that replaces items that get lost or stolen, extended warranties that double manufacturer's warranties, rental car coverage and travel insurance.
  • Credit cards offer safer automatic bill payment. I love the convenience of paying bills automatically, but there aren't many companies I trust to dip directly into my checking account. Enter credit cards, which allow me to charge a variety of monthly bills. I can settle them with one payment, turn to the card issuer if there are any disputes and get rewards points for every dollar I spend.
  • Credit cards offer protection against identity theft. If an identity thief uses your credit card, it's typically no big deal. As long as you report the bogus charges within 60 days of your account statement, the transactions are typically erased, and you're issued a new account number. If a thief gets your debit card number or check information, your account can be drained before you know it, and you often have a wait to get your money back.
  • Credit cards can help in an emergency. It's a running joke that people get credit cards for "emergencies" and then decide that a dinner out or a great sale qualifies. In reality, though, a card can help you manage many of life's setbacks. (See "Saved by plastic: 5 true credit card rescue tales" for some examples.) And while nothing can really replace an emergency fund, using a credit card is better than turning to a payday lender or other high-rate source of funds if you face an expense you couldn't otherwise pay.
  • Credit cards reward savvy users. Rewards programs such as cash-back cards tempt many users to spend more on the cards and carry more debt. A Federal Reserve Bank of Chicago study found that in an average month, a customer using a 1% cash-back card got an reward of $25 but spent an additional $68 on the card and increased his debt by $115. Interest on credit card balances would more than wipe out the benefit of any rewards.

But savvy users know not to carry balances, so they get their rewards for free. In addition to cash back, they can get free and discounted airline tickets, as well as free hotel rooms, gift cards and merchandise.

Again, I'm not advocating credit cards for those who can't control their spending. For these people, a credit limit of $1 is too much and $1 million is not enough; there's no such thing as a credit line they can't misuse and max out.

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Then there are the folks who have more self-control but simply don't want to tempt themselves. If that's you, I'd encourage you to consider setting up some automatic charges to your cards, with an automatic payoff each month, so you can keep your cards active and working for you without risking ruinous debt -- or being shut off from credit you may need.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.