So today’s financial tip I want to talk about the idea of credit cards. Do you really need them? Why do people use them so much? Can you just get by with a debit card?
There are a variety of arguments for using a credit card.
1) You can boost your credit history and credit score. It is certainly true that you can boost your credit history and credit score by having a credit card. And most people think you need a good credit score to buy a car, house, or even for a job. More and more employers are looking at credit reports in making final decisions about employees.
2) Credit cards can provide you consumer protections that a debit card can’t. For example, if your identity is stolen, along with your credit cards, all of the purchases that are made can be disputed and you shouldn’t have to pay a thing. It can offer another lay of consumer protection, supposedly, that debit cards or cash can’t.
3) A credit card can provide a quick emergency fund, if you need it, to get out of a jam. The problem is that if you use credit cards to live on when you don’t have extra money you are severely asking for trouble. Credit cards aren’t income, but I think a lot of people treat them as they do.
4) Convenience. It is much easier to pull out a credit card and use it, sometimes, then with cash. Cash you can lose and once that cash is gone it is gone. Credit cards provide that convenience that people like.
5) Rewards. Many people use credit cards because of the rewards they provide. I fully admit that I use my credit card for miscellaneous purchases to get that money added to my investments. And if you are really good you can do something called travel hacking where you can maximize rewards and get cash back and/or travel rewards you can use to go on trips. Several of the blogs I follow have become masters at the travel hack.
Certainly these could be some legitimate arguments for using a credit card.
What Do I Think About These Arguments?
Total Bollocks! You DO NOT NEED A CREDIT CARD IN TODAY’S ECONOMY! I don’t care what anyone tells you. Now I do have a credit card that I use and pay off every month so I might sound a bit hypocritical here. However, I don’t NEED a credit card. I choose to use it in a responsible way, something I have not done in the past. So far my financial experiment is working. But I can see in the future going back to a cash or debit card budget.
Let’s take these arguments one by one (and there are others as well). 1) One reason people argue for using credit cards is to boost your credit score. They say you need it to survive in America today. Why? Credit scores are based upon a few things and one of them is the amount of debt you have opened. So the logic is that the more lines of credit you open the better your score will be. Congratulations, you have just created a lot of debt so you can get a bigger score. That’s smart.
But Jason what about buying a car or house? For one, I would encourage anyone and everyone to buy cars with cash. If you can’t afford to buy it with cash maybe you can’t afford that car. No one says you DESERVE a new car. Also, you can get mortgages today with a large down payment and manual underwriting. Not all banks will manually underwrite your loan, but if you have 20% or more done you most likely will find one in your area.
2) Credit cards do provide consumer protections, but so do debit cards. In fact, there isn’t much difference between the two regarding consumer protections. The consumer protections that we enjoy often come from the processing service, VISA or Mastercard. For example, whenever you have a Visa symbol, if you are victim of fraud, you have a zero liability embedded into that card. And you have similar protections with Mastercard as well. Certainly, if your card is stolen or misused (e.g. your kids taking it) you have to be a bit aware of having charges reversed or whatever. But you would have those problems with or without a credit card.
3) Credit cards can be used as a quick emergency fund. If you are using your credit cards as an emergency fund then you have bigger problems. Credit cards are not a means for people to buy stuff. THey are not income. And most people aren’t disciplined to use them and pay them off every month. If you are one of those people great, but circumstances changed. It took me a long time to pay my credit card off every month. I would carry a balance often. Instead of just using money in the bank I would use a credit card and get into a heap of trouble. That is why we should all have an emergency fund that is JUST for emergencies.
4) Convenience. Credit cards do provide a convenience that is true. And frankly I am sick and tired of people doing things out of convenience. When you use your credit card or even debit card studies demonstrate that we spend more. Isn’t that fantastic. Americans have trillions in debt and we need plastic to increase that debt. That is smart. Yeah…no thank you.
5) Rewards. I fully admit I use my credit card for the rewards and someday I want to try travel hacking (once my debt is paid off). But again, people who do these things also are forced to spend money to receive rewards. I can understand it if this was normal spending, but I know some people who have gone out and made sure they bought a new couch or whatever so they can get the travel reward or cash back. They are spending when they don’t need to spend. Why? For a lousy couple hundred bucks. Again, if you are disciplined and put “NORMAL” spending on the card I can see doing it, but doing it so you can a $50 check or $100 or whatever is dumb. I only put normal spending on my card.
A final argument and it isn’t a bad one is that credit cards are needed for travel and renting a car. The reason for this is because often they will put a deposit or hold on your credit card. It is there to make sure you return the car or don’t skip out on the hotel bill. I certainly understand why businesses do that, but if you are traveling why can’t you put money in your bank account to make sure it could cover the rental deposit? I mean if you have the means to travel wouldn’t you have the means to put money on your debit card?
The Bottom Line
You don’t NEED a credit card to get by in America. Don’t fool yourself that you need it. I don’t NEED a credit card. I fully admit I use it and pay it off every month, but if I ever get into trouble again, I am cancelling it immediately. Moreover, I only have ONE credit card. I don’t have anymore and I don’t want anymore.
My wallet is full of two debit cards, insurance cards, a flex benefits card, and a bunch of gift cards I haven’t spent yet (need to go to this great restaurant where we live). You don’t need a credit card. And if you do get one ONLY use it if YOU KNOW for sure that you can pay the balance off every month. It shouldn’t be used because you saw the perfect outfit and have to have it. If it is on sale once it will be on sale again. Credit cards aren’t money. It is debt plain and simple and the debt trap is dangerous.