Life without a credit card is certainly possible but can be inconvenient, to say the least. Consumers who choose to forego credit will be at a distinct disadvantage when it comes to reaching certain pivotal financial goals.
Credit Card Required
Some transactions are difficult or impossible to make. Car rental agencies are a great example. Although it’s possible to rent a car using a debit card, doing so almost always means that a substantial hold is placed on the consumer’s funds pending safe return of the vehicle. Also, many rental car agencies perform a credit check on anyone using a debit card to pay. The consequence is a hard inquiry on and corresponding dip in credit score. Too many inquiries will eventually result in application denial. Hotels often have a similar debit card policy. Users who eschew any kind of card use severely limit their purchasing power, particularly online. A few online retailers (including Amazon.com) allow orders to be made from a checking account, but most retailers require a credit or debit number.
Cash is Not King
Using cash has its own challenges.
Safety: The consumer must carry a great deal of money in order to make a large purchase.
Liability: While a lost credit card results in almost no financial consequence (charges are reversed, a fresh account number issued, and the cardholder is on the hook for no more than $50 at worst), a lost roll of bills will be replaced by no one.
Suspicion: Cardholders who regularly use cash to purchase air travel, for example, may attract the scrutiny of aviation authorities.
Inconvenience: A medical or dental office is unlikely to have a cash register on site from which to make change.
Credit Cards and Your Credit
For a good or excellent credit score, the consumer must use a mix of credit products (revolving and non-revolving). That usually means an auto loan, a mortgage and one or more traditional credit cards. Student loans also help round out a person’s financial portfolio, as do personal loans and even some business loans (if taken out by the individual and not the business). Credit age and credit utilization ratio are score factors that suffer when a person stops using credit accounts. Consumers who pay off debt and close accounts will eventually lose the benefit of the longevity of the account, though it takes 10 years for accounts in good standing to be removed after being canceled. When used properly, credit cards are a credit-building instrument. The consumer need not carry a balance in order to get the full credit score benefit. On the contrary, cardholders with the very best credit scores, 800 or higher, never have a balance greater than ten percent of available credit.
A cash-only philosophy is not inherently a bad idea. Cash-only consumers generally don’t want to risk debt creep or get caught up in complicated financial dealings.
There is freedom in reducing the number of bills to pay each month. Those who have dug themselves out of deep debt are wise to avoid falling into the credit card trap again, and those who haven’t experienced debilitating debt are smart to steer clear. People who don’t travel frequently and do most or all of their shopping locally may never even notice the absence of the card. But the disadvantages are obvious.
Consumers in this category will probably end up with something called a “thin” file. Credit reporting agencies will assign a low credit score (or no score at all) because insufficient data is available. The only way to build a healthy score is to use credit products. There can be no score when there is no credit data on which to base it.
At best, anyone with a thin file will have access to credit products that come with very unfavorable, expensive terms. Higher interest rates, lower limits and more fees are the norm. When buying a home, a poor credit score can easily mean tens of thousands of dollars in extra fees and charges.
At worst, the cash-only consumer may not be able to successfully complete certain financial transactions at all. Cash-only consumers will encounter tough obstacles when it comes to getting approved for any loan. And there will be small, irritating snags like having to put down a cash deposit to set up a utility or cell phone account. A poor score will also preclude some apartment rentals and employment opportunities. Government employees who depend on their security clearance risk losing their job.
The cash-only consumer also has limited options in case of an emergency. Setting aside ample funds in an emergency account becomes critical. We should all live by this philosophy anyway, but a cash-only consumer must realize that there is no Plan B.
Even Cash-Only Consumers Need to Check their Credit
The cash lifestyle is preferred – or cannot be avoided – by several million people, perhaps as many as one-fourth of all American consumers. Whatever the reason for avoiding credit cards, it is critical to learn and practice good credit monitoring skills, if only to watch for possible fraud.
Get a free copy of your credit report every twelve months from each of the three major credit reporting agencies – Equifax, Experian and TransUnion – by visiting AnnualCreditReport.com.
This post originally appeared on CreditCardInsider.com.
Kimberly Rotter is a debt management expert and personal finance writer. She is a regular featured contributor on Credit Card Insider, Credit Sesame, Investopedia and CreditRepair.com and her work has appeared on numerous other personal finance sites including Yahoo! Finance, LearnVest, Business Insider and GoBankingRates.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.