Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but this does not affect the opinions or ratings of our editors.
It is totally okay to avoid having a credit card. Consumers can pay entirely by cash, check or debit card while maintaining a positive credit history with other types of loans. According to a 2020 Federal Reserve report, 79% of American consumers had at least one credit card, which could mean that up to 21% of American consumers survive without it. Anyone can use cash to make purchases or get a debit card from a bank for convenience.
However, while there are ways around not having a credit card in the US, there are downsides to doing so. Here’s what you need to know if you decide to live a plastic-free life.
Disadvantages of not having a credit card
Giving up credit cards can make it difficult to build up a decent credit history with a good credit score. Typically, students (or even proactive high school students, if parents co-sign them or add them as authorized users) get a school credit card first, which allows for an early start in building a credit history. credit. Once they’re ready to buy a car with an auto loan or buy a house and take out a mortgage, their credit history needs to be deep enough that a loan can be obtained. Without that kind of history, it can be difficult to make major financial purchases later in life.
Using only cash or a debit card may also have limited reward potential. One of the benefits of owning a credit card is receiving rewards or cash back on grocery, gas or travel purchases. Some US banks offer small rewards with debit cards, but it can be difficult to find great debit cards.
Another downside to only using debit cards is that they don’t offer the same type of purchase or fraud protection. Refunding fraudulent purchases to a checking account may take longer or not happen at all depending on the bank or the situation.
And finally, activities like renting a car or staying in a hotel room can be more complicated if you only use a debit card. Some companies will take a large deposit from your checking account if you use a debit card, which could tie up your money for days.
Ways not to have a credit card
Despite some significant drawbacks, there are ways to get good credit and maintain a healthy financial history without purchasing a credit card:
- Use cash or a debit card to limit your 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 what is available. This can be an effective form of fiscal discipline. Debit cards are also more convenient than cash, especially for shopping online.
- Earn credit by paying other loans or bills on time. Student loans or a car loan co-signed by a parent always count towards the loan holder’s credit history. One-off payments can improve a loan holder’s credit rating, but it can take longer to get good credit this way. Paying other bills on time like rent, utilities, phone or cable can sometimes count towards a credit history. While these payments are not normally reported to the credit bureaus, there are free programs that can help. For example, Experian offers a free program called Experian Boost that will add a positive bill payment history to an Experian credit report.
- Become an authorized user. Becoming an authorized user on someone else’s credit card account does not require the user to obtain their own credit card account. This can be a useful workaround for people who have a responsible friend or family member who is ready to help them build their credit history. As an authorized user, the user will enjoy all the benefits of a positive credit history and credit score as long as the primary account holder makes their payments on time and pays their balance each month. Before becoming an authorized user, make sure that the credit card issuer reports authorized user activity to the credit bureaus.
- Get a credit builder loan. Credit loans help people build a good credit history as long as they make payments on time every month. Once approved for a credit builder loan, the lender will hold a small or large amount of money which the lender must repay in installments. Once they have paid off the entire loan, all of the money will be returned to the lender, who can then be placed in a checking or savings account. This is usually not the best way to build credit because there is a cost, but it is an option available.
It’s possible to avoid having a credit card, but it might not be the best option depending on your financial goals. There are, however, ways to get good credit without credit, such as applying for a credit loan, becoming an authorized user, and creating credit by paying other bills on time. However, only using cash or a debit card to make payments has its drawbacks. Debit cards don’t offer the same type of purchase or fraud protection, and they often don’t have the same cash back or signup bonuses. Make sure you research all the pros and cons of not having a credit card before giving it up altogether.