The truth is that in many cases, you can get by without a credit card. Learn more about when you should get a credit card—and when you might want to wait.
Pros and Cons of Getting a Credit Card
Pros Explained
You’ll build credit history: You must establish a strong credit track record to access other lending products you might need in the future, such as a mortgage or an auto loan. A simple way to begin building a credit history is by opening a credit card, using it sparingly—say, to pay for a monthly subscription service or for gas—and paying the bill in full each month. You’ll be shielded from fraud liability: Most credit cards have a zero-fraud liability policy that lets you off the hook for any fraudulent transactions made on your account. In addition, by law, you’re liable for transactions worth no more than $50 that occur before reporting the fraud. With debit cards, you could be liable for as much as the entire amount that was stolen, depending on when you report the theft. You won’t have to carry cash when traveling: Credit cards are more convenient and safer than carrying a lot of cash in your wallet when traveling. Some credit cards don’t charge foreign transaction fees, which means instead of taking out cash from fee-laden ATMs or exchanging cash at unfavorable rates, you can use your card to make purchases when traveling abroad. Just make sure you pay off your balances as soon as possible. You could earn cash back or travel rewards: Savvy users are able to earn credit card rewards that can be redeemed for everything from statement credits to free flights. Even your first credit card could give you the opportunity to earn rewards, though the top cards often require excellent credit. The key is to avoid carrying a balance—that way, your reward earnings won’t be offset by interest payments.
Cons Explained
You could be tempted to overspend: Without responsible spending habits, you might end up with a balance that’s beyond what you can actually pay. A good rule of thumb is to only spend what you know you’ll be able to pay off by the due date. You could feel more overwhelmed by bills: If you’re barely getting by while covering other expenses, a credit card might seem like a lifeline, but it could quickly become another growing expense. Before turning to a credit card to save you, focus on streamlining your expenses and building a budget you can stick to. You may not be ready for the responsibility: If you don’t know much about credit scores, credit reports, how interest works, and other key credit concepts, you might want to wait to use credit cards until you know more. Improper credit usage could put your credit score at risk, which could affect your ability to get more credit when you need it.
When You Should Get a Credit Card
Before you apply for a card, it’s important to consider your personality and how likely you are to keep your balance low and make payments on time. “You know you’re ready for a credit card when you’ve managed your money responsibly,” said Tae Lee, founder of Never Go Broke and creator of the finance-based family board game Game of Fortune. As a general rule of thumb, you should be able to pay off a credit card balance in one to two months, although it’s ideal to pay off your full balance each month to avoid paying interest. Take a look at the following situations to find out whether you should get a credit card.
When You Need To Build Credit
Credit cards are useful as a tool for building credit. They let you show lenders that you can borrow money and pay it off on time. You have to be at least 18 years old to qualify for a credit card in your name. If you’re under age 21 and applying for a credit card, you’ll have to prove that you have your own verifiable income. Otherwise, you’ll have to apply with a cosigner or become an authorized user on someone else’s credit card. Building credit may be easier to do with a credit card, but only if you use the card responsibly. Carrying a balance on a credit card can actually negatively affect your credit score, especially if your debt-to-income ratio is high. This is why it’s important to manage your credit card usage carefully and pay the bill in full each month.
When You Want To Shop Online or Rent a Car
It can be easier to manage a car rental or a hotel rental with a credit card. If you choose to use a credit card for this purpose, be sure that you already have the money set aside to pay the full amount in your next billing cycle and avoid carrying a balance on your credit card or paying unnecessary credit card interest. However, it’s not absolutely necessary to have a credit card to shop online or rent a car. In fact, you can do almost everything with a debit card that you can with a credit card—except spending money that you do not have.
When You Need Money for Emergencies
It’s handy to have a credit card in case of emergencies. If you have an unexpected but urgent need for money, a credit card lets you pay for things right away, even if you don’t have the cash on hand. But you have to remember that borrowing money for an emergency means you’ll need to pay it back with interest.
When You Want To Save Money on Purchases
Many stores will offer discounts for having a store credit card. You’ve probably been offered a percentage off your purchase in exchange for opening a store card, or been invited to save during special “cardmember” sales. Stores do not offer cards to give you discounts, however. They offer cards because they realize that, while most people intend to pay the card off every month, few actually do. They make more back on interest than they do on the discount they offer to you. Unless you pay the card in full every month, you will likely pay more in interest than the discount you saved.
When You Want To Earn Rewards
Some credit cards, like cash-back cards or travel rewards cards, offer attractive perks in the form of cash, airline miles, and other rewards. You can use these rewards to save money on travel or other expenses. However, using credit cards to earn rewards can be risky. It’s only a wise financial decision if you pay your balance in full each month—in other words, if you can actually afford the purchases you make on your rewards credit card. You also have to weigh any annual fees against the rewards you might earn. It’s also important to remember that the card issuer offers its rewards because most people are not going to pay their credit cards in full each month. The company earns a profit on the balance a customer carries on a rewards card, and that profit is often much higher than what the rewards cost the company.
Alternatives to Credit Cards
A credit card can be a useful tool, but you do have alternatives.
Timely Bill Payments
You don’t need a credit card to build your credit history. You can also build credit by paying your bills on time. For example, you can build enough credit to qualify for a home loan by paying your rent, utility bills, and car payments on time for several years. Be sure to ask your landlord about getting your rent payments reported to the credit bureaus.
Debit Cards
While it may be convenient to have a credit that you use solely for renting cars or paying for hotel rooms, it’s not necessary. For example, you can use a debit card instead of a credit card to rent a car. Just be aware that the car rental company will put a hold against your debit card for a specific amount, so be sure to have that much available in your checking account. You can also get discounts and perks with certain debit cards. For instance, if you really need or want access to in-store discounts, some stores now offer a debit card option with similar savings. And as with store cards, there are also debit cards available now that offer rewards points, so you can earn rewards without opening a credit card account.
Emergency Funds
Credit cards should not be your fallback in the event of an unexpected emergency. Instead, you should set up an emergency fund. An emergency fund with $1,000 in it is a good start, but it’s ideal to have three to six months of expenses saved up. A sufficient emergency fund will allow you to handle any setback that comes your way without going into debt. It may also be a good idea to have your emergency fund in a savings account and tied to your checking account, so you can quickly transfer money between accounts when needed. Having one or more credit cards can be a good thing, but it depends on how responsibly you manage your credit. If you add credit cards, do it gradually, keep your overall debt level low, and make every payment on time. Your credit score could benefit from having one or more credit accounts and a lower credit utilization ratio. If you don’t feel comfortable building your credit that way, then focus on paying your bills on time for now. You can always open a credit card later on.
