Do You Really Need a Credit Card?
Using a credit card is a matter hot debate for many people. Some would claim that using the credit card could leave users deep into debt which in turn deters them from achieving their financial goals. On the other side, people argue that credit cards help in building the credit history which is instrumental for future financing opportunities like getting a home or new car.
If you don’t own a credit card yet, you might wonder if you need one. The truth is, we all have different stances when it comes to credit cards. And how you determine whether you need a credit card depends mostly on how efficient you are in managing your finances as well as what your financial goals are.
What Is a Credit Card and What Does it Do?
A credit card is a piece of card you swipe to pay for purchases. It’s similar to a debit card wherein you can make purchases without cash. But instead of deducting the purchase amount from your bank account (in the case of the debit card), you make a short-term loan when you use the credit card.
Credit cards widely accepted payment methods for most products and services, in-store and online. While you can use both credit cards and debit cards in most establishments (grocery, department stores and retail outlets), a credit card comes particularly handy when you book hotel accommodations and flights. In fact, some hotels only accept credit card payments while others may allow debit cards but would charge it several dollars upfront.
When you qualify for a credit card, the issuer will give you a credit limit. This credit limit is the maximum amount that you’re allowed to borrow. So when you’re using a credit card, you can think of it as borrowing money from your credit limit. You don’t have the parked funds to pay for the purchase right away; instead, you pay for it once your billing statement comes in.
Perhaps the most crucial aspect to owning a credit card is how you pay for it. You see, when you receive your monthly statement, you need to strive to pay for that amount in full before the due date. Otherwise, your bill is charged an interest. Therefore, if you pay for your bill in full and in time, you’re borrowing money with no charged interest. But if you pay the bill late, you’ll have to pay the principal plus interest. Important, remember that your credit card bill could balloon considerably if you keep missing your due date or are only paying the minimum amount.
Credit Card Usage Statistics
According to creditcards.com, their 2016 survey reported that 40 percent of the respondents preferred to use credit cards, 35 per cent for debit cards while 11% per cent of the respondents preferred to use cash. The same survey also showed that respondents use the credit card for large-ticket expenses like the travel and dining reservations while the debit card is often used for ordinary daily purchases.
Additionally, creditcards.com found that out of 10, seven people were carrying at least one plastic in 2015. This could translate to 174 million Americans owning at least a single credit card to their name. Meanwhile, FICO reported that most Americans wait until adulthood to own a credit card, due mostly to the fact that they have to manage their student loan debts. Also, individuals who are 21 years or younger applying for a credit card are likely to get rejected due to the Credit Card Act of 2009.
Moreover, the US Federal Reserve cites that as of May 2016, out of the $3.62 trillion of consumer debts, $953 billion of which comes from credit card debt. In a study conducted by Harris Poll, it was found that the average credit card debt per household in 2013 was $6, 224. In the last quarter of 2017, the average spiked to $7,135.
If these data tell us something, it’s that credit card use is the dominant mode of payment in America, a lot of Americans carry at least one credit card in their wallet and that credit card debt is rising year after year.
The Advantages of Credit Cards
There are several reasons why a lot of Americans use credit cards, and here are the top benefits.
- Convenient Purchasing – most credit cards are acceptable not only in your local state or country but worldwide as well. This gives you significant purchasing power when you’re travelling; you’re running low on cash or just refuse to carry a lot of money. The plastic helps you make purchases conveniently with only one swipe.
- No Cash Upfront – using a credit card to pay for purchases instead of cash is also useful when you don’t have the money with you at the moment. For instance, if you want to buy a brand gadget or book flights, you can charge the purchase today then pay it off later. Consider it like taking a loan without going through the loops and hassles.
- Establishing Credit – many people also use credit cards to build and maintain a decent credit standing. Those without any credit history yet can use their credit card to get started. To establish your credit history with a credit card, you need to make sure to keep your credit utilization low, your balances low or zero and to pay your bill and on time. Consistently practicing these will bring your credit score up, which in turn can open better financing opportunities like getting a mortgage or car loan at a better interest rate.
- In Case of Emergencies – your credit card can act as an emergency fund for when you need to financially stay afloat despite an unexpected circumstance like a job loss. The credit card can pay your bills, buy your food and do everything else that cash is supposed to do. The credit card gives owners a sense of security knowing that it’s something they can always pull should a sudden, and urgent expense arises.
- Protection – purchasing with a credit card gives you some extra protection that cash and debit cards aren’t able to provide. For instance, when you are buying something using the credit card and found that the product was not what it claims, getting a refund is much easier. Also, it’s easier to report and get your money back should a fraudulent activity on your account.
The Drawbacks of Credit Cards
Although credit cards have better protection and convenience than cash and debit cards, there are also some drawbacks.
- Gateway to Impulsive Spending – given the credit cards’ convenience, it is easy for card owners to get into impulsive spending which in turn get them into more debt. Even if you pay the minimum amount and settle your bill on time, a credit card has this certain pull that gets you into bad spending habits. It is mainly because you don’t see the money leaving your account and it doesn’t hurt as much seeing cold cash emptying your wallet.
- Interest – well, you don’t get to borrow money for free from your credit issuer. Otherwise, they won’t be making any profit at all. Your credit issuer charges your bill with interest if you don’t settle it before the due date. And when you’re late with your payments, you get charged with late fees as well. When you sum them all up, it’s easy to see now why many people find it hard to get out of credit card because the interest racks up each day you fail to settle your bill in full.
- Can Kill Your Credit Score – we know it’s been said that a credit card can help you build and improve your credit score. However, wrong use of the plastic can destruct your credit score as well. And this doesn’t just apply to your late payments. You must also remember that having high credit card balances can hurt your score. Therefore, if you make an extra-large purchase and consume a good amount of your credit limit, your credit score could dive down.
Do You Need A Credit Card?
Now, we go back to the question: do you really need a credit card? The answer is not the same for everybody. The best that you can do is check how you handle your finances, what your financial goals are and whether or not owning a credit card is aligned with those goals.
If you want a more definite answer to this question, you need to ask more questions.
Are you Disciplined or Impulsive?
We are living in a consumerist world and having a credit card gives you a new kind of freedom to spend. If you can honestly say that you can’t resist a new leather handbag, latest smartphone or limited edition jewellery, then you should admit that you have a spending problem. You want to curb these issues first before deciding whether it’s a good idea to apply for a credit card.
Do you understand how interest works?
Say for example you incurred a $2,000 purchase on your card and committed to paying only the minimum due amount. The minimum amount you are required to pay gives you a false sense of security because you’re still incurring interest on your bill and you’re not crushing this debt at all. It must be understood that the only way to stay away from interest is to pay your $2,000 purchase in full and on time, so if you think you can get away from interest with just the minimum amount, you need to think again. Before you know it, the bill has ballooned into a debt that’s more challenging to get out of.
Are you just there for the perks?
If so, you might consider getting a rewards credit card for this very purpose. However, if you think you can keep charging your credit card and justifying your expenses with the cash backs, reward points and miles, despite being unable to afford the purchase, you might just get into more trouble later on.
It’s also essential to consider where you stand financially at the time you are contemplating getting a credit card. You need to have at least a stable, regular-paying job so you can be sure that there’s an incoming paycheck to pay for your credit card bills. You must also come to a point where you’re able to master your finances, so you don’t fall into spending impulses. You must be able to budget your money accordingly and make sure that you can pay your bills on time.
If you’re not there yet, you might consider postponing the credit card application at a later time. This will also give you more time to think whether owning a credit card fits your financial perspective and goals.
How To Build Credit Without A Credit Card
Many people get a credit card for the primary reason for building a credit record. It is in fact, the fastest and easiest way to build credit history mostly because many credit cards are easy to qualify for nowadays, offer zero percent introductory rates and importantly, they report your activity to the credit bureaus.
However, you should also know that having a credit card is not the only option. Here are some of the best ways to establish credit record without getting a credit card.
Pay Bills In Your Name
One of the fastest ways to get your financial activity reported to the credit bureaus without owning a credit card is to pay some bills under your name. Many people split the bills in between them, but the person who’s listed as the payer is also the very person who gets to build a credit record. If this is the case, consider transferring one or more of the bills (cable, mobile phone plan and utility bills for instance) under your name.
Consequently, you need to make sure that you pay the bills on time and in full to establish proper credit.
Take Personal Loans
You might also consider taking personal loans to build credit. But before that, you need to make sure that the lender reports to the credit bureaus to truly maximize the loans as means to building credit.
Personal loans are often unsecured (meaning, they don’t need collateral) and come with high interest rates. If you’re going down this route, shop for the best loans provider offering the lowest rate possible. Use the loans responsibly, pay it off promptly, and over time, your credit should build up.
Piggyback on Someone Else’s Credit Card Account
You can become an extended user of another person’s credit card and take advantage of this opportunity to establish your credit score. The method is to become an authorized user of another credit holder, who could be your parents, close friend or partner. The person needs to be a responsible credit card owner – keeps the credit ratio, pay bills on time and leaves zero balance on the account – for this strategy to work. When the said person starts posting late payments, you own credit standing could dive as well.
Pay Your Student Loans Responsibly
Many college graduates incur some amount of student loans during their years in college. While this translates into a long-term financial obligation that could well run into your adulthood, you can take this as an opportunity to build your credit score. Like everything else that has been mentioned above, you need to make sure that you’re paying your student loans responsibly for it to make a positive impact to your credit standing.
Secured Credit Cards
Secured credit cards are like the regular credit cards which can swipe to pay for purchases. But the difference is that you give a security deposit to the credit issuer when you apply for a secured credit card, and this deposit will act as a cushion for when you start missing payments. With a secured credit card, you actually already have the funds to pay for your purchases; which is contrary to using a regular credit card which you actually need to pay at a later time. Use the secured credit card wisely and pay your bill promptly and you should soon notice an improvement to your credit score.
Although many people use credit cards nowadays, this is one decision that you need to take to heart. Owning a credit card means you will be incurring debt, and if you’re not careful, this debt could make profound impacts on your financial life. On the other hand, if you’re a cautious credit card user, this could help improve your credit score which as a result, could provide better financing deals in the future.
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