Frustrating as it may sound, the answer to ‘do you really need a credit card’ is – it depends. That’s true. Whether you really need a credit card depends on a number of factors, primarily your financial goals and your spending habits.
There’s no doubt a credit card offers some powerful benefits, from helping finance big purchases and earning attractive rewards to helping you build or rebuild credit. However, it is entirely possible to carry out all financial transactions without owning one. In fact, there are many people who go through life and thrive financially without ever owning or needing a credit card.
Having said, getting at least one card is a good idea. It can help make things easier for you, but only provided that you use it responsibly. Being reckless with your spending can send you reeling into debt resulting in several long-term consequences.
Understanding the benefits and downsides can help you answer the question of ‘do you really need a credit card’.
Benefits Of Having A Credit Card
Here are some of the potential benefits:
#1. It’s a quick and easy way to build your credit score
Your credit score is based on how well you manage credit. Making all your credit card payments on time adds points to your credit score. Timely payments are the fastest way to boost your credit score.
Lenders report your payment activity to the three major credit bureaus – Experian, Equifax, and TransUnion. These credit bureaus use the data collected to calculate your credit score. Every payment that you make before the due date will improve your score by a few points. On the other hand, every late payment will pull your score down.
A good credit score helps make it easier for you to get approved for a mortgage, vehicle loan or any other line of credit in the future. A good score will also qualify you for a lower rate of interest, so you save money too.
#2. It offers invaluable purchasing power when you need it most
We’re not talking about walking into an electronics store and being able to buy the latest video game console with your credit card. If this is your reason for getting one, you’re better off not getting one at all.
The real value of a credit card’s purchasing power is in the financial cushion it provides when you need to pay for emergencies. For example, your home or vehicle may need expensive repairs done urgently or you may need to cover expensive urgent medical treatment. These things cannot be put on hold until such time that you can afford to pay for them. They need to be addressed right away. At times like these, a credit card can be an invaluable asset.
#3. The rewards help you save money on your purchases
Credit cards offer an array of rewards and sign-up bonuses in some form of the other. Some offer cash back on purchases, others offer miles that can be used to pay for travel, still others offer cash bonuses. It’s important to take the time to choose a card that works best for your situation. This will help you get the most out of your card.
For example, if you travel a lot, you can rack up points or miles with a travel card. You can then use these miles to bring down the price of your next travel ticket, saving you a lot of money over time. However, if you don’t travel, those points will be wasted.
Another thing to be careful about is getting tempted to spend more than you can afford or building up a massive balance that you can’t afford to pay off. No matter how attractive the rewards, they are just not worth getting into debt.
#4. It is safer than carrying cash or even a debit card
If you don’t have a credit card, you’ll have to carry cash or a debit card with you at all times.
The risk of carrying cash is obvious. If someone robs you and steals the cash from your wallet, there’s nothing you can do to get it back. It’s lost forever,
Carrying a debit card also carries some risk. If your debit card gets stolen, the thief can withdraw the entire amount from your savings account. You can file a complaint with the bank and get your card blocked, but usually it’s already too late. You may get a new card but it’s highly unlikely that you’ll get your money back.
If your credit card or card number gets stolen and an unauthorized purchase is made, you do have considerable fraud protection. You can call the card company and ask them to freeze the card against all future purchases. Moreover, federal low limits your liability to $50. Many credit card issuers will go one step further and waive the liability altogether, if, prior to the theft, you’d been spending responsibly and making on-time payments.
Downsides Of Having A Credit Card
Knowing only the benefits of having a credit card but not the downsides can give you a completely inaccurate picture. It’s important to understand the risks along with the benefits.
Here are a few of the potential downsides:
#1. You may be tempted to overspend
This is by far the biggest problems that credit card holders encounter. This is especially dangerous for people who buy on impulse and can’t resist the temptation.
Let’s say you see something you really want to own but you don’t have the cash on you at the moment. So you pull out your card and buy the item you want on credit. The thrill of the purchase however will be short-lived if you can’t afford to pay the credit card bill in full by the payment due date. Sure, the lender will accept only the minimum and will let you pay the amount at a later. But they’ll also charge you interest on the outstanding amount. This interest will keep accruing until you clear it and will only send you further into credit card debt.
#2. Late payments will damage your credit score
On-time payments on your credit card bill are key to building your credit score. Even one late payment can pull your score down by a few points. More than one late payment will wipe out the benefits of having a one all together.
So…Should You Get A Credit Card?
As we said earlier, you don’t necessarily need a credit card but it does offer some powerful benefits if you use it strategically. In the end, it’s more important to ask yourself whether or not you should get a one.
You should consider getting a credit card only if:
- You’re committed to using it responsibly to build credit or rebuild poor credit.
- You travel often or are planning a vacation. A credit card offers unparalleled convenience and protection when you’re traveling rather than carrying bundles of cash.
- You want to finance a large purchase. A credit card offers more than just the ability to purchase something upfront even when you don’t have the cash on you. It also allows you to dispute the charge if you have issues with the item you’ve bought. You can’t do this with cash or a debit card.
- You shop online. A credit card limits your liability against unauthorized charges, which is a crucial safeguard when shopping online.
You should not consider getting a credit card if:
- You spend above your means more often than not. Having a credit card makes it all too easy to give in to impulse purchases.
- You’re unemployed. Income is one of the factors that impacts your chances of getting approved. If you apply for a card when you’re unemployed, you’ll likely be denied and the hard inquiry that gets triggered from your application will cause your score to drop a few points.
Can You Build Credit History & Improve Credit Score Without A Credit Card?
Using a credit card is the easiest and fastest way to build credit history but it’s certainly not the only way. If you are looking for a way to build credit history but you’ve decided that getting a credit card is risky for you, there are other things you can do.
Here are some ways to build credit history without a credit card:
#1. Make all installment loan payments on time
Installment loans are all lines of credit other than a credit card. This includes student loans, car loans, personal loans, and mortgages. Payments on all these loans are reported to credit bureaus and factored into your credit score calculation. Making all installment loan payments on time every time will help you build credit history and boost your credit score even without a credit card.
#2. Become an authorized user on another person’s credit card
This is an alternative if you want to build credit history but are not eligible for a credit card. The key is that the person must have excellent credit. And of course, they must be willing to add you to their credit account. As an authorized user on their credit card, you’ll benefit from the primary cardholder’s credit score. You can contribute by using the card and making timely payments.
#3. Get a credit-builder loan
A credit-builder loan is designed to help borrowers build credit history without installment loans or credit cards. This is a unique type of loan offered by online lenders, community banks, and credit unions. With this type of loan, the loan amount is put into a savings account. You make monthly repayments over an agreed-upon term, usually 6 to 24 months. You can access the money after paying off the full amount. These payments are reported to the credit bureaus and go into calculating your credit score. When taking a credit-builder loan for the purpose of building credit, what’s important is that payments must be made on time. Make sure to choose a loan amount and monthly payments that you can afford.
Do You Really Need A Credit Card? Final Thoughts
Having a credit card is a great way to build credit, finance purchases, and get reductions on your purchases. But it can cause debt and hurt your credit score if you use it irresponsibly. The key to unlocking the benefits without the downsides is to take the time to choose the right one and commit to using it responsibly.