David Lerner Associates: Life Without Credit Cards: Is It Possible?
Credit cards have become such an ingrained part of financial life in 21st century America that it’s hard to imagine living without one. Is it even possible to survive without possessing and using at least one credit card?
The answer is yes — and a surprisingly large percentage of Americans are doing just that. In a poll conducted by CreditCards.com, 29 percent of respondents (who were at least 18 years of age) said they do not own a credit card. This is up 10 percent from the number of people who said they don’t own a credit card from the year before, so it might be indicative of a new trend.
Pros and Cons
There are a number of potential benefits of not using credit cards, but it can also present some challenges. But first, the benefits:
1. Less debt and interest— This is the most obvious benefit. When you use cash or a debit card instead of a credit card to pay for purchases, you aren’t assuming any additional debt or paying any additional interest. With debit cards, the amount of your purchase is immediately deducted from your checking account. (It’s important to make sure there is enough money in your account to cover the purchase and avoid overdrawing your account.)
2. Lower expenses— Studies have consistently shown that consumers generally tend to spend more money when using a credit card to pay for purchases than they do when using cash. Some experts say this is due to the fact that people tend to be more aware of the real cost of items when forking over hard currency than when just swiping a credit card through a terminal.
3. A different spending mindset— According to a study published in the Journal of Consumer Research, shoppers who pay for items with a credit card focus more on the benefits of the purchase, while those who pay with cash focus more on the cost of the purchase. As a result, those who eschew credit cards for cash often have a better idea of how they spend their money and are thus able to develop the discipline to spend less.
In fact, research conducted by the National Foundation for Credit Counseling determined that individuals who live on a cash basis end up saving about 20 percent of the money they previously charged on credit cards. Better yet, they don’t feel like they’ve deprived themselves of things they need or want.
Inconveniences and Potential Liability
The biggest potential challenge of not having and using credit cards is the inconvenience this can cause with certain types of transactions, such as booking a hotel, renting a car, buying an airline ticket, or making purchases online. While debit cards can usually be used for these purposes, they generally don’t offer the same consumer protections as credit cards.
For example, the Fair Credit Bill Act protects consumers from fraudulent credit card charges if they submit a written dispute within 60 days of receiving their credit card account statement. But the Act doesn’t cover debit card users, who are liable for up to $500 in fraudulent charges if they file a dispute more than two business days after the unauthorized transaction occurs — and possibly for the entire transaction amount if it isn’t reported within 60 days.
Not having or using a credit card can also make it more difficult to establish good credit, which can pose a problem when applying for a home mortgage, automobile loan or other type of consumer financing. If you close out existing credit card accounts with no balance, this generally will not impact your credit score. But the history of this account, including any missed payments, will likely remain on your credit report for about 10 years.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC