Should You Ditch Your Credit Card?

A popular media financial advisor recommends destroying all your credit cards and living a life completely devoid of credit. The high interest rates on credit cards, he argues, pull money away from building wealth.

While it may make sense to forego credit when looked at in this narrow way, it helps to take a look at all the factors involved in this kind of decision. The main argument against credit is that it opens up the opportunity to overspend and thus incur high interest rates when you can’t pay the balance off immediately. However, this argument is akin to saying that you shouldn’t own a car because it opens up the opportunity to drive recklessly. A credit card used safely as part of a sound financial plan can be a tool to open up numerous possibilities for your financial future. If you forego using a credit card you could:

Have a Hard Time With big Purchases in the Future
Lenders generally want to see that you have good credit before agreeing to give you a large sum of money. Most credit scoring models factor positively that you have wisely used a revolving account like a credit card. If you don’t have a history of using a credit card judiciously (with on-time payments and low balances), you may have to pay a higher interest rate because your score wasn’t as high. In the final analysis, not having a credit card could end up costing you thousands of dollars in higher interest payments. The positive benefits to your credit standing can also make it easier to rent an apartment or land a job.

Have Less Security
If you buy an item with cash or with a debit card, the money is transferred to the seller immediately. With credit cards, there is a lag between when the purchase happens and when the money is actually transferred to the seller. This allows time to cancel any transactions you believe to be fraudulent.

Not Have Access to Funds in an Emergency
The old saying tells us that the only guarantees in life are death and taxes. This ignores unexpected large expenses, though, which are pretty sure bets too. Your best bet to deal with these situations is to have an emergency savings account established. However, failing that, having a credit card lets you easily pay for things like sudden car repairs or booking transportation quickly to help a loved one in need. Without a credit card, you could be stuck waiting much longer to get access to the funds you need, or be forced to take out a loan with unfavorable terms.

Cost Yourself Money
Although they aren’t often thought of in this way, when used wisely credit cards can actually be a way to put more money into your bank accounts. The most obvious way to do this is to use a cash rewards credit card to earn cash back on your purchases. However, there are other potential bottom line benefits too. Take for example the consumer protections offered by many credit card providers. If you make a credit card transaction and don’t receive the goods or services that were promised, your credit card company may just be able to step in on your behalf and use their leverage to make sure you get your money back or are otherwise given a satisfactory outcome. This potential money-saving protection can extend even after you have purchased and received an item since some credit card companies offer extended warranties on items purchased with your card. Finally, many online retailers that offer deeply discounted merchandise you need in your day-to-day life only accept payment via credit card. If you can’t snatch up the bargains because you don’t have a credit card, that deal just evaporated.

No one knows your financial habits and preferences better than you. When making the decision on whether or not to use a credit card, make sure you are aware of all the potential benefits and drawbacks of each option. That way you can choose the path that best puts you on the course to ultimate financial success.

Revised January 2016.

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