Why Avoiding the Credit Card Isn’t Great in the Long Term

blog-why-avoiding-the-credit-card-isnt-great-in-the-long-termLately there has been a lot of discussion about people in my generation (the 18-35 age group) ignoring credit cards with posts coming from the New York Times to The Consumerist. We have reached adulthood during a recession and  seen firsthand what happens when debt takes over our lives. Everyone has seen houses foreclosed and abandoned, people moving in with their parents due to debt, and friends exiting college with loans they may never pay off.

 

Because of this, many of us decided we don’t want to end up in permanent debt, paying off credit card companies for the rest of our lives. So, we avoid credit cards entirely. We utilize other payment methods: debit cards, prepaid credit cards or straight cash.

 

Now, this makes sense from a short term standpoint – if you have existing debt you are not adding to it, or if you are debt free, you aren’t adding a new burden. But perhaps these individuals have not considered the long term ramifications of not building up a credit history.

 

Disadvantages of Not Having Credit Cards

 

Credit cards by definition are mobile sources of credit. They let you make a purchase on something for which you may not have the exact funds on hand. This can be abused  by making a number of purchases you can’t afford, but by not having the card, you ignore the potential temptation and stay within your means.

 

However, you do miss out on the benefits of credit card ownership by only using debit, prepaid or cash. A lot of credit cards give you some form of benefit: cash back on groceries or gas, miles for frequent flyer programs, and even discounts at restaurants. Also you are limited to your withdrawal limit or the maximum on the prepaid card. If you have a ceiling of $500 dollars and need $600, you may be out of luck without a credit card.

 

And this leads us to perhaps the biggest long term impact.

 

The Credit in Credit Cards

 

Credit cards directly impact your credit score. You are telling the credit bureaus “I pay off my obligations,” and paying off debt as agreed, is a positive factor in calculating your FICO score.

 

As I mentioned above, not having a credit card and the established credit history that accompanies it can become a hassle when large expenses surface. Let’s say you need a new car after your faithful ride has reached that point where it is no longer economically feasible to keep operating. You arrive at the dealership with a great deal going on for the new models and find the perfect car for your needs. One of the first things that happens is they run a credit check on you and as you had not been building a credit history with a credit card since college, you are denied the financing option.

 

You should always be careful with any purchases, and not force yourself into debt. But by avoiding credit cards entirely you may not be helping yourself in the long run. Financing for big purchases are usually dependent on your credit score, and by not building up a credit history, you may not be able to get the home, car or electronics you would get had you been building up your credit during this time. Moreover, building a credit history is not something that can take weeks – by getting a credit card during or after college and responsibly paying off your debt in the years prior to making these large purchases, you will have found the benefits of a successful credit history far outweigh any short term benefits gained by not owning a credit card.

 

Michael Cohen is the Content, Community and Social Media Manager at myFICO.com.

Comments

  1. I was always told to “spend only what you have” meaning if it isn’t in your checking account, don’t borrow.
    When I pulled my duck score in 12/11 it was 554 so I opened 2 secured cards, 6 months later my score gained 100 points after paying on time… Then I opened a “credit builder” which is a GREAT option if you do not want to borrow.. My score just hit 727!
    It took me 1 1/2 years but it is worth it, I’m now buying my first home!
    So if you do not want to borrow, secured cards and credit builder accounts are great options.

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