Getting a credit card and using it wisely is a great way to build a good credit history and prepare yourself for larger financial commitments. Getting a credit card and using it unwisely is a great way to bury yourself in a high-interest debt trap.
All things considered; you don’t need a credit card. A credit card is convenient and has many advantages, but you’ll have to decide whether those advantages outweigh the risks and whether you’re ready to take full advantage of a credit card right now. There’s nothing wrong with postponing your entry into the world of credit cards until you’re sure the time is right.
How a Credit Card Can Help You
There are real advantages to having a credit card. Here are a few of them:
- Convenience. You can make payments almost anywhere, in person or online, without having to carry cash or constantly draw from an ATM. You can track your spending easily with regular itemized statements that tell you what you bought and where you bought it. That convenience is a primary reason for getting a credit card.
- Potential for interest-free credit. Credit cards give you an interest-free grace period: as long as you pay your balance by the due date it’s an interest-free loan. If you select a card with no annual fee and pay every balance in full before the due date, you can have all the convenience credit cards offer without spending a cent.
- Building your credit history. If you get a credit card, use it for necessities, keep your balance below 30% of your credit limit, you’ll establish a good payment history and good credit utilization without spending any money that you wouldn’t have spent anyway.
- Earning rewards and bonuses. Many credit cards offer signup bonuses and other rewards. If you know your spending habits and select cards that reward them, these rewards can add up to a substantial amount of money.
- Purchase/return protection. Many credit cards offer varying levels of insurance for new purchases that protect you against damage or theft. Some also allow you to return a purchase for a refund even if it’s against the seller’s policies. Credit cards let you hold or reverse a payment if the goods or services you paid for are unsatisfactory.
- Extended warranty protection. Many credit card issuers offer extended warranty protection on some purchases. Check with your issuer for specific policies.
- Travel benefits. Credit cards have a range of benefits for frequent travelers. They make it easy to rent cars and reserve hotel rooms. Many offer trip cancellation insurance, trip delay protection, even access to airport lounges. Many travel-oriented cards don’t impose fees for overseas charges.
- Delayed payments. A credit card lets you buy now and pay later. That can be a huge advantage when you’re short of cash and there’s a bill that needs to be paid.
- Free access to credit scores. Many card issuers will give you your current credit score on each statement.
That’s a compelling package. There’s another side to the picture, however.
How a Credit Card Can Hurt You
The advantages of using a credit card are matched by some very real risks, including the following:
- Spending money you don’t have becomes very easy. Research has demonstrated that people tend to spend more and spend with less inhibition when they use a credit card than they do when they’re spending cash. Handing over cash hurts. Swiping a card doesn’t.
- You can fall in the minimum payment trap. When you get your credit card statement, you’ll see that you can easily keep your account in good standing by making a small minimum payment. You have other uses for that money – we all do – so it’s easy to just make that payment. Then you’re paying interest on that balance, and if you keep making charges on the card the balance will add up fast.
- Some cards come with high interest. The average US credit card interest rate is 19.02% for new offers and 15.10% for existing accounts. The average interest rate on a personal loan is 9.41%. In both cases you will pay more, sometimes much more, if your credit is below average, but interest rates on credit cards are consistently higher than interest rates on loans. That can cost you money if you carry a balance.
- You can damage your credit. If you start running up a high balance that’s close to your credit limit, your credit utilization ratio will rise. That can damage your credit. If you make a late payment or miss a payment you can do serious damage to your credit.
- Fees can add to the cost of the card. Many credit cards have annual fees and many add on other fees, like balance transfer fees, cash advance fees, and late payment fees. Many credit card users don’t bother to track their fees or understand what fees are costing them.
- Credit card agreements can be complicated. Many credit card users signed the agreement without reading it, or without understanding parts of it. That can have serious consequences down the line.
- There is a risk of fraud. Credit cards offer extensive fraud protection, but to take advantage of that protection you need to spot fraudulent charges. Many users don’t read their statements carefully and fraudulent charges can slip by.
Every one of these pitfalls is avoidable, if you use your credit card carefully and responsibly, stay within your budget, and pay your balance off in full every month. That hasn’t stopped tens of millions of Americans from falling into the credit card debt trap. If you aren’t careful you could become one of them.
Can You Get by Without a Credit Card?
Many people will tell you that a credit card is necessary. They’ll offer reasons that sound convincing. Let’s look more closely at some of those claims.
- You can’t build credit without a credit card. Getting a credit card and using it wisely is a great way to build a credit history, but it’s not the only way. Making on-time payments on student loans or a car loan can also build your credit history, or you could look at the credit-builder loans offered by many banks and credit unions. More and more lenders are accepting alternative data such as your income, employment record, and history of rent and utility payments as a basis for lending. Remember that losing control of your credit card spending can also damage your credit!
- You can’t shop online without a credit card. A credit card makes online shopping easy, but you can still shop online without one. Debit cards, prepaid cards, and online payment services like PayPal can all pay for purchases at online vendors. You won’t be able to spend money you don’t have, but that’s not always a bad thing!
- You can’t rent a car or reserve a hotel room without a credit card. Car rentals and hotel reservations are easier with a credit card, and if you travel regularly it may be worth getting a card for that purpose. If you’re only using these services occasionally, though, you can get by with a debit card. You may have to do some research into outlets that will accept debit cards and prepare in advance, but it’s not impossible,
- Credit cards can save you money. It’s true that many stores offer discounts on purchases made using their store cards. The stores do that for a reason, and the reason isn’t charity. They know that people who have those cards are more likely to shop in their stores and spend more than they otherwise would. They also know many of them won’t pay their balances in full every month and will end up paying interest on those cards. You’re likely to spend more than you save.
- Credit card rewards are irresistible. Credit card rewards are tempting, but to use them effectively you have to resist the temptation to spend just to get rewards. If you’re getting rewards for money that you would have spent anyway, you’re ok. Many people fall into the trap of spending more just to get the rewards. That’s why the card companies give the rewards, and while that works well for the company, it may not work so well for you! Remember that if you don’t pay that balance in full by the due date your interest costs will probably be greater than your rewards.
- You need a credit card for emergencies. A credit card can be a useful tool in a financial emergency, but it’s just going to kick the problem down the road, and you’ll be paying high interest on that money. That can easily create another financial emergency. You’d be much better off setting aside an emergency fund that will let you deal with emergencies by spending money you have, rather than money you haven’t earned yet.
There are advantages to having a credit card, but don’t let anyone tell you that you can’t live without one. Millions of Americans get by without a credit card, and so can you.
Are You Ready?
Almost all Americans will own and use a credit card at some point in their lives. The question you’re asking yourself is whether you really need a credit card right now, or whether you might be better off waiting.
Here are some signs that you’re ready to manage a credit card:
- You have a regular income.
- You are saving money consistently.
- You think before spending and you live within a budget.
- You have an emergency fund.
- You want a credit card to help you build a credit history.
These signs indicate that you might be better off waiting to get a credit card:
- Your income is limited or unreliable.
- You have trouble living within your income.
- You have no savings.
- You frequently make impulse purchases.
- You don’t understand how credit card interest works.
- You want a card so you can defer paying for purchases or cover costs when you run out of money.
If that sounds like you, it might be better to wait for a credit card until you’re in a more stable financial position. If you work on improving your financial knowledge and spending habits, you’ll manage your card better when you decide you’re ready for one.
The Bottom Line
If you’re wondering whether it’s possible to live without a credit card, the answer is “yes”. There are good reasons for getting a credit card, but if you’re not convinced that you can use one productively you can certainly get by without one.
Before you apply for a credit card, review your finances, your spending habits, and your reasons for wanting a card. If you’re convinced that you’re ready, go for it. If you have doubts, don’t hesitate to wait. You may be the only one in your group of friends that doesn’t have a credit card, but you’ll also be the only one without credit card debt!