Credit cards: Pros, cons, and tips
You aren't required to have a credit card, and plenty of people get along just fine without them. But with self discipline and on-time payments, credit cards can reap great benefits.
I am frequently asked what my views are on credit cards and their usage. Do I need to have a credit card? Is it okay not to have one? How does one use a credit card in a financially responsible lifestyle? How does a credit card help my overall credit rating? What are some good credit cards to use?Skip to next paragraph
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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I thought I’d address all of these things in a single post, just so it can easily be referenced in the future.
My Experience with Credit Cards
When I was in college, I signed up for my first credit card at one of those convenient booths that credit card issuers love to set up on college campuses. They offered me some sort of small novelty item when I signed up, most likely a t-shirt and/or a frisbee.
The card arrived in the mail. I used it a small amount during my college years. When I left school, I was carrying a small balance on it.
It was during the post-college years when the balances really grew. I got married. I bought a car. We went on a honeymoon and a few other really nice trips. The credit card balance went up and up and up. I got another card or three.
We had a child, and that’s when things started to change. The needs of parenthood began to alter our lifestyle and our goals, and we eventually came to a tipping point. We paid off all of our cards and closed several of them.
Today, we have three credit cards between us, each of which is tied to a specific retailer that we use. All of the cards are paid off in full each month, so we enjoy the rewards without the drawbacks.
Do You Need a Credit Card?
No one needs a credit card. Credit cards are merely useful tools that achieve several benefits, but also have several drawbacks. I liken credit cards to knives: they can be incredibly useful tools in the right hands, but incredibly dangerous in the wrong hands.
First, the positives:
They help establish a positive credit history. Unless you are never going to own a home, own a car, go to post-secondary education, rent an apartment, apply for a job, have insurance of any kind, or make any purchase without cash in hand, you’re going to want a positive credit history. Companies pull your credit report for all of the above reasons and many others. Your credit report is simply the easiest way for a business that doesn’t know you to establish that you’re a trustworthy individual, one who can get better rates on insurance or who can rent an apartment in a nicer building or countless other things.
They make many purchases very convenient. You can make purchases almost everywhere, usually with just a swipe of a card. Most online purchases practically require a credit card of some kind.
They don’t provide direct access to your checking account. If your credit card number is stolen, the thieves don’t have access to your checking account as they would with a debit card. Credit card companies usually do a very solid job in handling such theft.
There are rewards programs that can provide some real benefits to card users.
At the same time, there are negatives:
It’s incredibly easy to spend more than you think you did. Unlike cash, you don’t see the money disappearing when you use a credit card. That abstraction can make it very easy to spend more than your mental accounting tells you that you did.
It’s incredibly easy to get into serious debt trouble. Because it’s so easy to spend too much, it’s easy to put yourself in a situation where you can’t pay off your balance each month. That means you’re going to be carrying a balance, which means you’re going to be handing interest payments to the bank. Bye bye, money.
If you’re not prompt on your payments, you can get hit very hard. Late payment fees are painful. The accrued interest from not making prompt payments is painful. If you’re not ready to be very diligent with your payments, credit cards will eat up your cash.
Is It Okay Not to Have a Credit Card?
Absolutely. Many people live just fine without a credit card, typically relying on checks, cash, and debit cards to manage their finances.
What’s the drawback? If you go this route and have not incurred any other form of debt recently, you’re going to have a pretty sparse credit report. This shouldn’t negatively impact things like insurance rates, but it might make it more difficult to eventually get a home loan. If you’re thinking about getting a home loan in the future, you will want to start establishing positive credit now rather than later, and a credit card is a simple way to do that.
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