With credit-card debt approaching the $1 trillion mark in 2019, it's no secret that the American economy is built on credit. Of important note, credit card debt actually decreased to $820 billion as of 4Q 2020, largely due to the global pandemic. Still, more than 191 million Americans have credit cards, with the average cardholder having 2.7 cards.
According to Debt.org:
"When the Bankruptcy Protection Act of 2005 was passed, making it more difficult for people to file for bankruptcy, there was a turn toward credit cards in a desperate attempt to pay bills. Credit-card debt soared, reaching its all-time peak of $1.028 trillion in July 2008 (an average of $8,640 per household). Most of that debt was due to unexpected medical bills. By April 2011, credit-card debt fell to $839.6 billion, a figure that has remained somewhat flat, although the average American household still owes $8,398."
1. You Already Have Enough Debt
For the first time in history, student loan debt ($1.56 trillion in Q4 of 2020) has outpaced credit card debt. Recent graduates leave college strapped with tens of thousands of dollars in debt. With monthly debt payments, it doesn’t make sense for many of these graduates to take on more monthly bills. Likewise, people with mortgage or auto loan debt may also decide to forgo credit cards until they’ve reduced their current debt obligations.
2. You Think You May Overspend
People with bad spending habits put themselves at risk of serious financial trouble by getting a credit card. Studies have shown that people spend more with the swipe of a credit card than if they have to come up with the cash for their purchase. If you already know you that have a tendency to go overboard with spending, it’s wiser to pass on a credit card than to tempt yourself with debt.
3. You Can't Pay the Full Balance Every Month
If you only work seasonally, part-time, or not at all, you might not have enough money to pay a credit card balance in full every month. Getting a credit card when you do not have enough money to pay the bill will lead to accumulating interest every month and growing risk to your credit.
4. You Don’t Understand How Credit Works
When you have no experience with credit cards, you'll find that using one is much easier than understanding interest rates.
Don't be fooled by the simplicity of swiping; there are pages of user agreements and hidden fees associated with every credit card. Thankfully, there’s also lots of information on the internet that can break down how credit cards work and how to use them wisely. Once you understand how interest is calculated, and what fees you will be charged, you’ll be in a much better position to use a credit card responsibly.
5. You Can Barely Afford the Bills You Have Now
If you make enough money to qualify for a credit card, but you already have too many bills, adding a credit card to your current obligations isn’t a great idea. Work on eliminating some of your bills and reducing your spending before you add a credit card to the mix.
6. You’re Not Financially Disciplined
It takes patience and self-control to use credit in a disciplined way. Without those skills, you can easily spend yourself into debt, interest, and poor credit. If you sense that you may unable to control your spending, making the decision to pass on credit cards is likely the best choice for your financial future.
7. You Don’t Want to Pay Interest on Your Purchases
By paying your balance in full each month, you can use credit without paying interest. It takes self-discipline to pay off your entire balance month after month and to ensure that you keep your spending at a level you can afford. Even if you intend to pay your balance in full each month, there will always be variables that put you at risk for not doing so. Without a credit card, you never run the risk of paying interest, being charged late fees, or damaging your credit score.
The Bottom Line
Surviving without a credit card at a time when electronic payments are taking over can be difficult, but there are some alternatives. You can use a debit card (which is tied to your checking account) in nearly every transaction where you’d otherwise use a credit card. A prepaid debit card, similar to a debit card but without a checking account connected to it, is another option, but beware of associated fees.
Renting a car or reserving a hotel can be more difficult with debit and prepaid cards. You may have to pay a higher security deposit or provide additional documentation. Check with the merchant prior to your reservation to find out what’s required based on your payment method.
Frequently Asked Questions (FAQs)
Is it bad to use a credit card?
Credit cards are a helpful financial tool for many people and can give you access to funds you need for a variety of purposes. However, some people can find it difficult to manage credit cards responsibly. If you're able to pay your balance in full every month and avoid racking up interest charges, you may be able to use and benefit from a credit card.
How do I build my credit without a credit card?
It's not quite as easy to build your credit without using credit cards, but it can be done. Always make payments on time for any loans you have. You can also try to make sure that your utility and rent payments are factored into your credit report. Ask your landlord and utility companies whether they can report these payments to the credit bureaus. You might also consider a credit-builder loan, which can help you learn good credit and savings habits at the same time.
How do I close a credit card?
Closing a credit card requires several steps, and before you close an account, you should be sure that it won't negatively impact your credit. If you do decide to close out your card, you'll need to pay the balance in full and use up any rewards first. Once you've done that, call your card's customer service to request a cancellation, then follow up in writing. Once your card issuer says your account is closed, check your credit report a few weeks later to be sure.