Do You Really Need a Credit Card?

Photo (cc) by 401(K) 2013

A friend of mine recently told me he does something that’s a little unusual in our society: He doesn’t carry a credit card.

In fact, he’s 30 and he’s never had one. Instead, he uses a debit card to make purchases.

This brings up an interesting question: Do we really need credit cards or can we get along without them?

At first, it doesn’t seem like a bad idea. You’d have one less bill to worry about each month and your finances might be in better shape. But there are some big disadvantages to a credit card-free existence. If you’re considering skipping credit cards, you’ll have to consider both the pros and cons.

Advantages

  • No credit card debt. If you have cards with large credit limits, it can be tempting to spend more than you can afford to pay off. Even if you carry only a small balance each month, this might eventually snowball into bigger debt. When you pay for everything with cash or a debit card, you buy only what you can afford to pay for right now.
  • Better purchasing decisions. Credit card users can shop based on wants, not cost, and may end up spending more money on single purchases. When you shop with cash, you’re more likely to consider the cost of an item first.
  • Less worry. My friend doesn’t carry credit cards simply because they would be one more thing to worry about. There’s some truth to that. When you carry plastic, you have to worry about keeping your balance low, paying off the debt and making payments on time — as well as keeping that card safe from scammers and thieves.

Disadvantages

Living without a credit card got easier when debit cards came around. Now, you can simply use your debit card like a credit card to pay for purchases in most cases. But that doesn’t mean credit cards are obsolete. Not having one still has disadvantages. (See: “Not Using Credit Card Rewards? You’re Leaving Money on the Table.”)

  • Travel hassles. Many hotels and car rental services require that you have a credit card to book a reservation. Cruise lines also link their own version of spending cards to your credit card, and some airlines ask for a credit card for in-flight purchases. You may be able to find a travel business willing to take a debit card instead, but making a reservation with a debit card can result in a hold of several hundred dollars being placed on the card. If you don’t have a lot of money in your account, this could be a problem.
  • Credit history. Credit card use is a major factor in many people’s credit reports. If you’re not building a history of responsible credit use and a solid credit score, you will have difficulty qualifying for loans for bigger purchases like a home or a car. If you can get approved, you’ll end up having to put more money down or pay higher interest than consumers with better credit histories.
  • Emergency fund. Having a credit card tucked away can give you a sense of security because you’ll be able to use your available credit limit to cover necessities if you lose your job or have to make a necessary but unexpected purchase.
  • Protection from fraud. While both credit and debit cards generally come with limited liability in case your card is stolen and used for fraudulent purchases, a credit card has extra security. If the product you purchased with your credit card isn’t what was advertised, you don’t have to worry about getting your money back, as you would with a debit card transaction. And if a crook quickly drains your checking account after stealing your debit card, that could create problems as bills come due. Theft of a credit card does not pose that problem.

Making the plunge

If you do decide to forgo credit cards, a few steps can make your life easier:

  • Build an emergency fund. Aim to have three to six months’ worth of expenses in your savings account so you’ll be covered for life’s surprises.
  • Look for credit elsewhere. Eschewing credit cards doesn’t automatically mean you’ll have a bad credit score. Look for other credit products – like retail cards or small personal loans – to help you build credit.
  • Use a debit card instead of cash. Debit cards offer more protection in case your wallet is stolen. If someone steals your cash, you’re out of luck.

Karen Datko contributed to this post.

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