Like most people, you probably applied for your first credit card in college to build credit. But now that you have an established credit history, do you really need a credit card?
Credit cards can make shopping and life more enjoyable, and if you need immediate cash, a credit card might be more convenient than a cash advance loan or asking friends for money.
Many of us have been trained to think of credit cards as a necessary evil. But given the fact that the average credit card debt for households with credit cards is more than $15,000, reports The Federal Reserve, credit cards can be more of a headache than perk.
It probably comes as no surprise that some people have discovered how to live without a credit card. According to a 2010 survey by CreditCards.com, “29% of people polled didn’t have or want credit cards.”
This may seem a bit risky, there are advantages to living without a credit card.
1. You’ll probably spend less money
If you don’t have a credit card in your wallet, you’re forced to spend only what you have in cash or in the bank.
A credit card can blur the line between what you can afford and what you cannot afford. You may buy stuff just because you can and then devote the next year (or longer) paying back your creditors. It’s easier to buy things that you would ordinarily leave in the store, which can result in spending more of your lifetime.
2. You don’t have to worry about annual fees
Some credit cards charge an annual fee, which can range anywhere from $35 to $495, sometimes higher.
Although the annual fee only comes around once a year, this fee is charged directly to your card and it can catch you off guard. Even if you rarely use the credit card, you have to pay the annual fee or lose your card privileges.
3. You’re likely to have a higher credit score
Getting a new auto loan or a mortgage loan may cause a slight drop in your credit score. However, this drop is usually short-lived.
Loans do not damage your credit score as much as credit card debt. Credit cards are revolving lines of credit, thus your balance and payment can fluctuate from month-to-month. Credit scoring models take into consideration your credit utilization ratio, which is your balance in relation to your credit limit. If you don’t keep a high balance on credit cards, your scores will probably remain in good shape. But if you max out your cards, or if your balances are more than 30% of your credit limit, using a credit card could actually lower your credit score.
4. You don’t have to worry about interest payments
Interest is the norm with any type of financing from a loan to a credit card. Apply for a loan and you can realistically receive a rate between 2% and 7%, based on the type of loan and your credit history. However, the interest rate on a credit card could be as high as 19% or 20%, depending on the credit card issuer. What you pay in credit card interest may seem minor today, but the interest you pay over the life of the balance can be astonishing.
5. You can avoid endless debt
Just in my circle, I know many who’ve dug themselves a deep hole – all with credit cards. They apply for a credit card with good intentions, often stating their plans to pay off the card each month. But within 6 to 12 months, they have a maxed out card and no way to pay off the balance.
That’s the thing about credit cards, anything can prevent repayment of the debt. You may use a credit card to buy a television with plans to pay off the balance in three months. However, a change in finances can push back your plans, at which time you’re stuck with the debt.
6. You can enjoy peace of mind
If you have a mortgage payment, a student loan, a car loan and other household expenses, you probably have enough bills to deal with every month. Why add a credit card to the mix?
Living without a credit card may limit what you’re able to do. You may take fewer vacations, or you may not be able to treat yourself as often as you like. But in the end, the stress of not dealing with credit card debt and interest payments can compensate for the fact that it takes longer to acquire stuff.
Do you have other perks of living without a credit card that you’d like to add? Let me know in the comments below.