5 Common Myths About Credit Cards
Do you really need a credit card?
You may think that having a credit card is a necessary part of maintaining financial health. And while having one can be helpful in some situations, you should carefully consider whether you really need a credit card before you sign up. Credit cards can be useful tools when used properly (paid in full every month), but they can be more of a liability than an asset if you do not manage them carefully.
The truth is, in many cases, you can get by without a credit card. If you find yourself struggling with credit card usage and credit card debt, you may want to close your credit cards and move to a cash-only system until you pay down your debt. Here are five common misconceptions about needing a credit card.
I Need a Credit Card to Build Credit
Actually, you can also build credit by paying your bills on time. For example, you can build enough credit to qualify for a home loan by paying your rent, utility bills, and car payments on time for several years. Be sure to ask your landlord about getting your rent payments reported to the credit bureaus.
Alternately, you can destroy your credit when you do not pay your bills on time. The utility companies and other businesses can send you to a collection agency if you are consistently late on payments.
The bottom line is this: You do not need a credit card to build your credit history. Sure, it may be easier to do with a credit card, but only if you use the card responsibly. Carrying a balance on a credit card can actually negatively affect your credit score, especially if your debt-to-income ratio is high. This is why it's important to manage your credit card usage carefully and pay the bill off in full each month.
I Need a Credit Card to Shop Online or Rent a Car
In many cases, your debit card will cover you if you need to rent a car or shop online. In fact, you can do almost everything with a debit card that you can with a credit card—except spending money that you do not have.
For example, you can use a debit card to rent a car. The car rental company will put a hold against your debit card for a specific amount, so be sure to have that much available in your checking account. While it may be convenient to have a credit that you use solely for renting cars or paying for hotel rooms, it's not necessary.
It can be easier to manage a car rental or a hotel rental with a credit card, however. If you choose to use a credit card for this purpose, be sure that you already have the money set aside to pay off the full amount in your next billing cycle and avoid carrying a balance on your credit card or paying unnecessary credit card interest.
I Need a Credit Card for Emergencies
Credit cards should not be your fallback in the event of an unexpected emergency. Instead, you should set up a fund for emergencies. A good initial balance for your emergency fund is $1,000, but it's ideal to have three to six months of expenses saved up.
A sufficient emergency fund will allow you to handle any setback that comes your way without going into debt. It may also be a good idea to have your emergency fund in a savings account and tied to your checking account, so you can quickly transfer money between accounts when needed.
I Need a Credit Card to Save Money on My Purchases
Many stores will offer discounts for having a store credit card. Stores do not offer cards to give you discounts, however; they offer cards because they realize that, while most people intend to pay the card off every month, few actually do. They make more back on interest than they do on the discount they offer to you.
Unless you pay off the card in full every month, you will likely pay more in interest than the 10% discount you saved. If you really need or want access to in-store discounts, some stores now offer a debit card option with similar savings.
I Need a Credit Card to Earn Rewards
Using credit cards to earn rewards can be risky. It's only a wise financial decision if you pay off your balance in full each month—in other words, if you can actually afford the purchases you make on your rewards credit card. You also have to weigh any annual fees against the rewards you might earn.
It's also important to remember that the card issuer offers its rewards because most people are not going to pay off their credit cards in full each month. The company earns a profit on the balance a customer carries on a rewards card, and that profit is often much higher than what the rewards cost the company. As with store credit cards, there are debit cards available now that offer rewards points.
Updated by Rachel Morgan Cautero.