More holiday shoppers this year are using cash or debit cards to avoid overspending with credit cards.
But what about the rest of the year? Is it possible in a credit-dependent society to get by without plastic?
“Credit cards are not necessary,” says Ed Fredericks, a finance professor at Pepperdine University. “Originally, credit was seen as a privilege. Soon it kind of turned into something that everyone had to have. Multiple cards were mailed out to people, whether they were able to carry credit or not.”
Granted, credit cards are convenient, offer protections you don’t get with cash or debit cards, and make sense for many consumers.
But the buy-now, pay-later system has lulled millions of Americans into piling on debt. And many consumers are finding in this tough economy that card issuers, at least for now, have the upper hand. Issuers are doubling interest rates, raising fees and lowering credit limits at the first hint of risk. These tactics – plus new annual fees – are being used even against disciplined customers who don’t carry balances.
“Right now, everyone wishes they didn’t have a credit card. People have gotten into such a deep hole with credit cards in the last decade or so and are desperately trying … to climb out,” says Beth Kobliner, author of “Get A Financial Life: Personal Finance in Your Twenties and Thirties.” “Cash is becoming a bit more in vogue.”
The latest government figures show that the average credit card debt is $7,905 per household, down from $8,387 last year, Kobliner says.
Yet millions of consumers live without credit cards. Some never got into the habit; others have sworn off plastic after being burned.
Danielle Peterson, a Web developer for the University of Maryland, Baltimore, hasn’t used a credit card for two years.
“It makes me feel pretty good. I really don’t miss having the credit card bill come at the end of every month,” she says. “I feel bad for everyone who has a credit card and is facing these interest rates and everything else.”
The 32-year-old got her first card while a student at the University of Maryland, Baltimore County, where she opened accounts with vendors on campus to get free T-shirts or other gifts. Card debt wasn’t a big issue until her senior year in 2000, when she took an unpaid internship in New York and lived off credit cards. Add tuition, and her balance ballooned to $8,500.
Peterson signed up for a debt management plan, closed her accounts and paid off the balance over 2¿ years.
A few years ago, she got another credit card as a backup. But after slipping into carrying a balance again, Peterson closed the account and paid it off. She now sticks with cash and a debit card that pulls money immediately out of her checking account.
Making the switch
Going without credit cards is an adjustment. It requires building savings and tracking expenses.
“I do a mental tally every time I’m using my card and what my balance will be after that,” Peterson says. She frequently checks her account balance online.
“This time of year is probably the hardest time to not have a credit card because of all the weekly sales,” she concedes. “But not having a card allows me to stay true to budget and not be tempted by impulse shopping.”
She’s right.
“You are more likely to buy and spend more when you use credit cards [rather] than debit cards,” says James Roberts, a marketing professor at Baylor University. A study of fast-food restaurants, for example, found that customers using credit cards spent 50 percent to 100 percent more than those paying with cash, he says.
People spend more with credit cards because it’s painless, Roberts says. You get what you want immediately, but the bill won’t come for a month.
Paying with cash or a check is painful because you see the money disappear before your eyes, he adds. Debit cards are a little less painful than cash, but they hurt, too.
Proponents say that credit cards are more secure and are required by merchants such as car rental agencies and hotels. Others say you need a card to build a credit history and credit score.
That reasoning is outdated, Roberts says.
Lose cash and it’s gone, of course. Federal law, though, limits your liability to no more than $50 if your credit card is stolen. Legal protections for debit cards depend on when you report a missing card, and it’s possible to see your entire account wiped out if you wait more than 60 days. But in practice these days, card companies frequently give debit cards the same liability protections as credit cards.
As the use of debit cards has grown, so has their acceptance.
“I traveled all over Europe on my debit card two years ago,” Peterson says. “I used it to book cruises and plane tickets, and rent cars.”
Of course, card policies vary among businesses, so you should check before traveling. According to some car rental policies, for instance, the agency will put a larger hold on a debit card than a credit card. And some agencies conduct a credit check on customers using debit cards.
As far as credit scores go, a credit card is an easy way to establish a score, but not the only way.
“You can have a very good score without a credit card,” says Barry Paperno, consumer operations manager for FICO, creator of the widely used credit score.
To generate a FICO score, you must have an account that’s more than six months old posted on a credit report and activity in that account within the past six months, he says. Besides credit cards, FICO takes into account student loans, car loans, a mortgage, home equity and other consumer loans.
Peterson, for instance, says she was able to get a car loan and a 30-year-mortgage with favorable terms without a credit card. One benefit you don’t get with cash or debit cards: If you have a dispute a merchant over a purchase made with a credit card, the issuer is in your corner to negotiate.
So, can you adjust to life without a credit card?
“It’s not going to be an easy shift if you have been relying on credit,” warns Bruce McClary, a counselor with Clearpoint Credit Counseling Solutions.
Planning ahead
Living without a credit card takes discipline. You must keep enough money in the bank to cover everyday expenses and unforeseen emergencies, such as your furnace dying. You must budget and track expenses to avoid overdrawing your bank account. And you may have to wait to purchase something you want.
Living without a credit card will take more work, but the trade-off could be worth it.
Says Roberts, “You can live a better life and be more financially at peace without a credit card.”
