Is owning a credit card even necessary?
March 4, 2013
By: Jennifer Goforth Gregory
Most of us reach into our wallets to pull out a credit card to buy a plane ticket or a pair of shoes we found online without even thinking about it. But for millions of people without a credit card, each of these purchases isn't as simple. People opt to not have plastic in their wallet for a variety of reasons; some want to operate on a cash-based system, some can't handle the spending temptation and others may not qualify for a credit card due to a poor credit score.
Can I still order online? What about travel?
But in today's society that assumes everyone carries plastic, is it possible to function as a consumer without a credit card? The answer is yes, but you may encounter more hassles, especially with travel reservations and online purchases, than those using a credit card.
You can buy a plane ticket with a debit card with most booking websites or airlines as long as the card has a MasterCard, Visa or Discover logo on the front and is not simply an ATM card. Or you can still buy that ticket at the ticket counter with cold, hard cash. More rental car agencies are now allowing debit card purchases as well, but a hold is placed on your account for the amount of the deposit, and you will not be able to access the cash until the car is returned. Many online purchases can also be made with a debit card or using a PayPal account registered to a bank account instead of a credit card.
Will not having a credit card hurt my credit?
Aside from the hassles, consumers without a credit card can run into financial ramifications. "With a low credit score or no credit record, you can find it hard to get a loan or even auto or home insurance since many states check credit for insurance," says Liz Weston, personal finance expert and author of "Deal with Your Debt."
But what if you don't want or plan to borrow money… ever? Few of us may find ourselves in that position, but for those who do, if they don't establish a good credit report, they will probably have a poor credit score. It's certainly a worthy aspiration to avoid debt entirely, but it's an even better idea to avoid debt and establish a good credit history.
Won't a debit card work just as well?
For many people without a credit card, having a debit card, especially those affiliated with a credit card company, can be a workable solution. However, there are some limitations to the debit card compared to a traditional credit card.
One of the major downsides is a debit card limits your access to funds in case of an emergency. "None of us know what our future will bring, and it's better to have access to credit than to close all of your options. If you lose your job or can't work for medical reasons, then you are most likely not going to be approved for credit at that time," says Weston.
Additionally, credit cards offer you protection against fraud and identity theft. "If you pay by debit card, you don't have a middle man to help you if a merchant doesn't deliver as promised or you are a victim of fraud," says Gregory Go, editor of Wise Bread's credit card guide. Also, with a debit card in the case of fraud, the money has already been taken from your account, and you have to fight to get it put back into your account.
What if I don't have a bank?
People who do not have a bank either by choice or because of poor credit often turn to prepaid or secured cards instead of a debit card. While prepaid cards are the often the only solution, Go says that prepaid cards have much higher fees than traditional cards, including an annual/monthly fee, loading fees and activation fees. "Carefully look at all of the cards to find the one with the lowest fees," Go says. "Unfortunately, the people who can afford the fees the least are often charged the most."
Overall, Weston recommends that most people should have a credit card in their wallet. One of the perks of using a credit card is earning reward points that you can apply to merchandise or travel. While Weston doesn't recommend using rewards as an excuse to spend money you don't have, people without credit card miss out on this opportunity to save money on vacations and purchases.
"However, there is a very small group of the population that cannot responsibly handle credit cards and are going to overspend to the point of not being able to pay," says Weston. "People who fall into this minority may want to consider not having the temptation of a credit card."