- Credit cards are an important tool and life can be more difficult without them.
- It can be harder to earn a good credit score without a credit card.
- You will miss out on important protections credit cards provide.
You may be surprised at all the disadvantages of not having a credit card.
Credit cards can come with high interest rates and sometimes lead you into financial trouble. As a result, some experts such as Dave Ramsey and Mark Cuban have recommended steering clear of them.
In reality, though, avoiding credit cards is usually a bad idea because life can be much harder without one. Here are three reasons why that's the case.
1. You'll need to find other ways to build credit
In order to be able to earn a good credit score, you need to demonstrate you can be responsible with borrowing. Unfortunately, it can be difficult to find someone willing to give you a loan that you can pay back responsibly if you don't already have a good credit score.
This creates a catch-22 for many people, since you can't gain access to the credit you need to earn a good credit score because you don't have a good score already. Credit cards are a way around this conundrum. Secured credit cards can be obtained by just about anyone, and can help you develop a positive payment history necessary to build a good credit score.
And credit cards don't just help people earn a good credit score if they have no credit record at all. Your score is based on having a mix of different kinds of debt, and using cards responsibly by paying them on time and not maxing them out. So if you have a credit card, don't charge too much on it, and pay the bills on time. This will help you improve your score over the long term.
If you do not have a credit card, you will need to find other ways to show lenders you can be responsible with borrowing. This isn't as easy as it seems, as many types of transactions such as paying rent or utilities on time typically aren't reported to the credit bureaus.
2. Money could be tied up when you use your debit card to make a deposit
Not having a credit card can also make life more difficult if you need to make a deposit -- which is a common requirement when booking things like hotels or rental cars or even when making reservations with certain restaurants.
While some companies allow you to use a debit card to make a deposit, this locks up the money in your bank account until you get your deposit back. That's a much bigger burden than having a hold placed on your credit card, which doesn't actually limit access to any of your money.
3. You can't dispute charges if a merchant disappoints you
Finally, credit cards come with important protections -- including the ability to dispute a charge if an item you bought is never delivered or isn't as promised. If you charge items on a debit card or pay for them in cash, you won't have this recourse.
When you dispute a charge, the credit card company investigates the issue. If it turns out the merchant didn't do what it said, the card company will initiate a chargeback to recover your funds and you won't have to pay for the item or service that wasn't up to par. This can save you from a lot of unnecessary financial loss.
For all three of these reasons, you shouldn't forgo using a credit card unless you have a very, very good reason to do so -- such as a complete inability to control your spending. Instead, you should get a card, use it responsibly, and take advantage of the benefits it offers.
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