According to a recent study by Bankrate.com, nearly two-thirds of millennials don't have a credit card, and most of those who do have just one.
While some of the reasons for not wanting credit cards are indeed valid, such as wanting to avoid debt, millennials could be doing themselves a huge disservice by avoiding credit cards altogether. In fact, there are several good reasons a credit card can be a part of a plan for a sound financial future.
It can make your life more convenient
Although it's not the most compelling reason, many aspects of life are simply much more convenient with a credit card.
Traveling is probably the most noticeable. Have you ever tried renting a car, or staying in a nice hotel without a credit card? It can be done, but you'll probably need to come up with a large cash deposit or allow a hold on your debit card, which can take several weeks to release.
And most major credit cards have built-in rental car coverage as well as some other nice perks. For example, some cards provide "baggage insurance," which can reimburse you for lost or stolen baggage when you buy your airline ticket with the card. And many have a purchase or return protection program, which can allow you to return purchases for an extended time period.
It can also be a "safety net"
Now, I'll never advocate carrying a balance on a credit card just for any old purchases. However, if you find yourself in a pinch, it can be really handy to have a credit card.
For example, a friend of mine's car broke down more than 400 miles away from home and needed a tow and about $600 worth of work before he could continue on his way home. And because fixing a car takes time, he needed to get a hotel room for the night.
Well, with about $120 in his checking account and almost no cash in his wallet, he would have been in quite a predicament if he didn't keep a credit card in the back of his wallet for emergencies.
A credit card can give you peace of mind, especially if you don't usually keep tons of money in your checking account. And, there are plenty of cards with no annual fee and decent (for a credit card) interest rates, so if you get one, it won't cost you anything unless you need to use it.
Do you plan on eventually buying a house or car?
I saved this one for last because it is the most important reason you need a credit card. Without one, building up a solid credit history can be extremely difficult, especially if you don't have anything like a car loan or mortgage to establish a payment history.
There are several aspects of your credit that can be helped or hurt by credit cards, or your lack thereof. In fact, not having a credit card can negatively affect 90% of your FICO credit scoring formula, according to the website myFICO.com. Let's look at the breakdown of this.
By far the biggest part of the formula, payment history takes into account whether or not you've paid your credit accounts on time. Well, if you don't have any credit accounts, the 35% of your score that depends on this can't really be maximized. If you have a car loan or student loan, it'll help, but lenders want to see a well-rounded history.
The next largest piece is "amounts owed," which accounts for 30% of your FICO score. You may think, "Well, without credit cards, I don't owe anything, so I must be doing all right here, right?" Wrong.
This category actually refers to the amounts you owe relative to your available credit. For example, if you have one credit card with a $1,000 limit and a $300 balance, you're using 30% of your available credit. But, if you have say, three credit cards with $5,000 in total limits and a $1,000 balance, you are actually using less of your available credit on a percentage basis, at just 20%. If you have no cards at all, this category could be a blank for you unless you have other available credit lines like a HELOC (uncommon for younger adults).
The length of your credit history (15% of your score) can be adversely affected if you wait until you need a car or house to apply for credit for the first time. And, an additional 10% of the formula comes from "types of credit in use," which considers the mix of credit accounts you have. If you have a few credit cards and a car loan all in good standing, you'll look much better to lenders than if all you have on your credit report is a student loan or nothing at all.
If you're worried about having a credit card, start small
Look for a credit card with a low interest rate and no annual fee to get you started. Rewards cards can be nice, but if you're worried about running up debt, you should probably skip these.
Another idea is to use a secured credit card, like this one from Capital One. Basically, you deposit an amount equal to your desired credit line, which you'll eventually get back when you close the account. It is reported just like a standard credit card and is treated just like one by businesses.
Whatever you decide, you should definitely think twice if you're among the 63% of millennials (ages 18-29) without a credit card. You might regret it someday down the road.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of Capital One Financial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.