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It is perfectly acceptable to refuse a credit card. Consumers can pay in full in cash, check or debit card and still have a positive credit history through other types of loans. According to a 2020 Federal Reserve report, 79% of US consumers had at least one credit card, which could mean up to 21% of US consumers are surviving without one. Anyone can use cash to shop or get a debit card from a bank for added convenience.
However, while there are ways to do without a credit card in the US, this has its drawbacks. Here’s what you need to know if you decide to live plastic-free.
Cons of not having a credit card
Avoiding credit cards can make it difficult to build a decent credit history with a good credit rating. Typically, college students (or even active high school students if parents sign up or add them as authorized users) receive the first credit card in school, which allows them to start building credit earlier. Once they are ready to buy a car with a car loan or buy a house and take out a mortgage, their credit history must be deep enough to be approved for a loan. Without such a history, it can be difficult to make large financial purchases later in life.
Using only cash or a debit card can also have limited reward potential. One of the benefits of owning a credit card is getting a reward or cashback for groceries, gas or travel purchases. Some US banks offer small rewards with debit cards, but it can be difficult to find suitable debit cards.
Another downside to using only debit cards is that they don’t offer the same type of purchases or fraud protection. Fraudulent purchases may take longer or may not be returned to your checking account depending on the bank or situation.
Finally, activities such as renting a car or staying in a hotel room can be more difficult if you only use a debit card. Some companies will withdraw a substantial deposit from your checking account if you use a debit card, which can block your money for a few days.
Ways to opt out of a credit card
Despite some significant drawbacks, there are ways to create a good credit history and maintain a healthy financial history without registering a credit card:
- Use cash or a debit card to limit spending. When only cash or a debit card is available, cash or the cardholder can only spend from their pocket or bank account. It is almost impossible to spend more than you have. This can be an effective form of budget discipline. Debit cards are also more convenient than cash, especially for online purchases.
- Increase your creditworthiness by paying other loans or bills on time. Student loans or car loans signed by parents still count towards the loan holder’s credit history. Timely payments can benefit the borrower’s credit rating, but it can take longer to build a good credit history this way. Paying other bills on time, such as rent, utilities, telephone or cable, can sometimes count towards your credit history. Although these payments are not usually reported to the credit bureaus, there are free programs that can do this. For example, Experian offers a free program called Experian Boost this will add a positive billing history to Experian’s credit report.
- Become an authorized user. Becoming authorized user on someone else’s credit card account does not require the user to open their own credit card account. This can be a helpful workaround for people who have a responsible friend or family member who is willing to help them build their credit history. As an authorized user, the user will receive all the benefits of a positive credit history and credit rating if the primary account holder makes payments on time and pays out their balance every month. Before becoming an authorized user, make sure the credit card issuer reports the activities of the authorized user to the credit bureaus.
- Get a developer loan. Lending to builders help people build a good credit history if they make timely payments every month. Once a loan is approved to create a loan, the lender will have a small or large amount of money that the lender has to pay in installments. Once they have paid off the entire loan, all the money will be transferred to the lender, which can then be transferred to a checking or savings account. As a rule, this is not the best way to get a loan, as it is expensive, but it is an option available.
It is possible to avoid getting a credit card, but this may not be the best option depending on your financial goals. However, there are ways to create good credit and without it – for example, apply for a loan creation loan, become an authorized user and get a loan by paying other bills on time. However, using only cash or a debit card for payments has its drawbacks. Debit cards don’t offer the same type of purchases or fraud protection, and they often don’t have the same cashback rewards or signup bonuses. Be sure to research all the advantages and disadvantages of not having a credit card before ditching it entirely.