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Why Most Americans Should Not Use Credit Cards

By Jason Steele

cut credit cardWhen people fall on hard times, they react to their new reality by taking a far more cautious approach to their personal finances, which includes turning towards other methods of payment for their daily spending. Although many people rely on credit cards, research points to decreased credit card use. The reasons why someone might discontinue using credit cards varies, but prolonged debt, and surplus of information about credit card interest rates can contribute to the decline in credit card usage.

The Credit CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act of 2009) added transparency to credit card statements, allowing cardholders to have easy access to information about interest rates, fees, and penalties. As cardholders began to realize the true cost of credit cards, many began to make determined efforts to reduce or eliminate their credit cards altogether.

Reasons Why More Americans Are Saying “No” to Credit Cards

There are many reasons why people cut up their credit cards, or forgo credit cards totally. These are the same reasons why most Americans should not use credit cards:

  1. Risk of Debt. When used as a method of payment, credit cards deliver convenience, security, a record of your spending, and potentially valuable rewards (i.e. how to use a credit card and rewards wisely). When used as a method of finance, however, credit card usage can be disastrous. Cardholders may initially find that they can charge large expenditures to their accounts, only paying a small monthly fee. As new purchases and interest charges continue to add to their balance, they quickly find themselves unable to pay their minimum balance, and close to default. Whether they have achieved the difficult goal of paying off their credit card debt, or have undergone a painful bankruptcy process, many people treat credit cards like addictive substances, and avoid them entirely.
  2. Increased Interest Rates. Cardholders should maintain control of their debt and if possible, pay off the balance of their credit cards every month. However, many cardholders cannot pay off balances every month, and interest payments quickly accrue. If cardholders make late payments or go over their spending limit, they may be subject to increased interest rates in addition to other fees or penalties.
  3. Reduced Access to Credit. Some Americans have less access to credit. They may have defaulted on home loans, been laid off, or experienced other financial difficulties. This can result in no longer qualifying for new credit cards.
  4. Lower Expectation of Credit. Many people who have experienced financial difficulties assume they cannot receive a new card. Their uncertainty, combined with their newfound aversion to risk, may cause them to ignore the possibility of obtaining a new card, even if they might qualify.
  5. New Alternatives to Credit. Debit cards and other new financial instruments that eliminate the risk of debt continue to flood the credit card market. Stored value cards, offered by many banks, offer many of the conveniences of debit cards. PayPal has also captured a large part of the market for Internet transactions.
  6. Credit Card Fatigue. Some cardholders become frustrated with their credit cards. Many people pay exorbitant late fees and penalties, or become victims of credit card fraud. Some families find that keeping track of their charges, and paying each credit card bill, is just too time consuming. Other ex-cardholders complain of negative experiences with their bank’s customer service department.
  7. Budgetary Simplicity. Some people prefer to pay for purchases with cash or debit cards. This helps to eliminate the risk of debt and simplifies budgeting. In addition, using cash instead of credit cards allows people to stay on budget (using the envelope budgeting system), and to keep a close eye on expenditures.
  8. Foreign Transaction Fees. International travelers may find that many credit cards charge foreign transaction fees for using credit cards outside of the U.S. The fee, often as high as 3%, makes it expensive to use credit cards in other countries.
  9. Reduced Risk of Identity Theft. People who do not have credit cards may have a reduced risk of identity theft.
cut up credit cards bills

When Credit Cards Can Be the Best Method of Payment

Despite all of the negatives, credit cards, when used responsibly, have a number of benefits:

  1. Chargeback Security. Cardholders have the right to request a credit card chargeback when they have not received goods or services they have paid for with a card. Chargebacks also apply when items received are not as described, or when items are damaged. This purchase protection virtually eliminates fraudulent activities. When you pay for merchandise with any other method of payment, you do not receive this level of fraud and purchase protection.
  2. Hotel Reservations. Many hotels cannot guarantee a room reservation without a credit card. Hotels that accept other payment options make paying for the room a difficult, time-consuming process, and these hotels may require a substantial cash deposit. Most hotels also require that guests leave a credit card on file with the front desk during check-in, in case of any damages or other expenses.
  3. Renting a Car. Very few rental car companies allow customers to rent cars without a major credit card. Rental car companies that do accept cash require that customers pass a credit check, and pay a cash deposit in case the car is damaged, lost, or stolen.
  4. Insuring a Rental Car. Almost all credit cards offer rental car insurance. This insurance is not perfect, but the protection is free with your card. Purchasing insurance from the rental car company can easily cost more than the price of the rental.
  5. Protection Against Theft and Mistakes. Cash can be stolen, and debit cards transactions can deplete a bank account when entered incorrectly. On the other hand, you have the opportunity to monitor and fix problems with your credit card statement before you have to pay your bill. Banks quickly apply debits from debit cards, checks, and cash to your checking account, sometimes within minutes of a completed transaction. When you use a credit card, you receive coverage against any fraudulent charges, including theft. You can report unauthorized charges, and ask the credit card company to review your credit card account to remove any unauthorized charges. Theft of a debit card must be reported to a bank within two days, to ensure the account owner is not liable for more than $50. Credit card theft can be reported anytime, and customers are not held liable for unauthorized charges.
  6. Emergency Funds. Credit cards can be useful during an emergency. If your car breaks down far away from home, you may have to pay for a tow truck, repairs, and a rental car with your credit card. If you have to travel last-minute due to a medical emergency, or need to attend a funeral, credit cards can also be useful. Some businesses don’t accept debit cards or checks, and in an emergency situation, a credit card may be the only available option.
  7. Building Credit. Credit cards can help you to build your line of credit. Establishing a consistent pattern of payment can vastly improve your credit score, so that you can obtain low-interest home mortgages and car loans, and better insurance rates. Some companies also order credit reports for prospective employees.
  8. Rewards and Discounted Purchases. Rewards credit cards offer 2% or more rewards on credit card spending (e.g. best cash back credit cards). By paying your balance in full each month, you can pocket the entirety of any credit card rewards, essentially receiving a discount on all of your purchases.
  9. Convenience. Every morning, I ride my bike to work without my wallet or even any cash. I put a single credit card in my bike bag, and that is all I ever need. I can use my card to make purchases online, buy lunch, and purchase anything else I need throughout the day. Carrying cash, checks, or other methods of payment seems cumbersome, and inconvenient.

Final Word

Many Americans have started tackling their problems with personal debt. Some people have decided to give up credit cards to manage their finances. Others use their cards less often. While most Americans should not use credit cards (based on statistics and trends on spending habits), it’s important that you weigh the risks of using credit cards, and their benefits, before deciding what’s right for you.

Have you given up your credit cards? Why or why not? Which of the benefits do you miss most?

(photo credit: Shutterstock)

Jason Steele
Jason has been writing about personal finance, travel, and other topics on blogs across the Internet. When he is not writing, he has a career in information technology and is also a commercially rated pilot. Jason lives in Colorado with his wife and young daughter where he enjoys parenting, cycling, and other extreme sports.

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Comments

  • http://www.abczoohome.com Amanda

    Hertz won’t rent a car on a Mastercard (or presumably Visa) debit card without a credit check. Fail that (as I did), and no matter how much $ you have in the account the card is linked to, you get no car.

    • http://consciouslyfrugal.blogspot.com ConsciouslyFrugal

      Thankfully, Hertz is only one of several car rental companies, particularly if you’re renting near an airport. I have rented from Enterprise in at least 3 cities with my little debit card.

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  • http://www.ultimatemoneyblog.com Mrs. Money

    Wow, that is great! We have one credit card we use for just gas. It is kind of a pain to use, but we get 4% back so we keep on doing it. :)

  • http://hubpages.com/hub/how-to-settle-credit-card-debt Silver Tea

    To Amanda above – why do you need to rent a car? Even if you have a temporary journey, you should be able to purchase a very old used car for peanuts and then dump it at the end of your journey. Probably cost you less than renting.

    I stopped using my credit card four years ago, and found my life got easier. It was one less thing to juggle, one less bill to pay. It’s no hardship living within your means. It actually comes as a relief. Spending borrowed money is stressful. And I’ve never been turned away just because I wanted to pay in cash or by debit card.

    • http://www.abczoohome.com Amanda

      I’m not necessarily talking about renting a car for a trip or for pleasure. If our car is being worked on or out of commission for any length of time a rental is the only way for my husband to continue going to work or anywhere else for that matter. There is no place I’m aware of where a car can be purchased on the spot in a matter of moments for $40-50, the cost of an average one-day rental car.

      I’m certainly not advocating credit cards, I was simply pointing out that there are, in fact, instances where a Visa/MC debit card is *not* accepted but a Visa/MC credit card is. Fortunately in our nearby city where Hertz turned us down, Avis rents to us whenever we need to, and we haven’t had trouble with hotels either. The author said to “show me a hotel chain or a rental car company…” Well, Hertz is one, that was my entire point.

  • Connie

    Hotel:

    From the Delta Montreal page. Was there last weekend.

    “A credit card is required to confirm and guarantee your reservation. Your security is important to us. We offer a secure website to process your information and take steps to maintain your privacy.”

    In canada we don’t have debit cards with Visa or Mastercard. But our debit cards are more economical because charges are process in the order they arrive. Unlike the states where they are processed in the way that makes the bank the most money.

    I don’t have a visa with rewards but would dearly love to. I use my other reward programs to the hilt. I made about 1200 last year, and didn’t buy a thing I didn’t need with them.

    There are no manual mortgage underwriters in Canada. Hubby is a mortgage broker. With no credit rating, you are treated to one of the perks of no credit significantly higher rates on your mortgage. You are considered a B risk. No banks will touch you (unless you are a customer that has a strong relationship with the employees and then sometimes). But HomeTrust will (for a fee)

    I pay a fee on my card but I haven’t had interest. I have gone over my limit and had to pay $29, twice.

    Credit cards make my life easy. I have lost my purse a grand total of 12 or 13 times in my life (ADHD–don’t ask) and if there was cash in there all those times instead of credit/debit cards, I would have lost more in losing my purse than the fees having a credit card.

    I agree they are snakes. I agree that maintaining a balance is no way to get ahead financially. But in my life they make sense.

  • http://www.yourfinances101.com/blog David/Yourfinances101

    When managed and used correctly, credit cards are in fact a good way to generate income.

    • Erik Folgate

      how do you use them to generate income?

  • Andrea

    I used to travel a lot for work as a contractor/freelancer, and as such, didn’t have a “company” card for charging expenses. I usually tried to use my debit card, to avoid interest fees on the expenses while I waited to be reimbursed by the client. However, my debit card was actually turned away once at a hotel, even though I knew I would have more than enough money for the room deposit (even though the room was paid in full in advance by the client). The reasoning, as explained to me by the desk service person, was that most people don’t have enough money to cover the charges, so they don’t accept them (or, apparently, the associated risk), despite debit cards working “just like a credit card.”

    It’s so unfortunate that everyone who uses a debit card is prey to policies based on what is considered the “general norm” of not having enough money in the bank. Of course, it’s also unfortunate that people who try to use their money responsibly by avoiding credit debt (not that credit is always irresponsible, just that it can be a source of trouble for many, as we all know), for whatever reason they choose, are punished for doing so. The result is an unfortunate and not entirely open or unbiased, but supposedly “objective,” metric (credit reports, FICO scores) for measuring who is worthy of what financially. *grumble*

  • Karmella

    I think that both points of view have their meritorious points. No matter which way you lean, it eventually comes down to paying attention to your finances and managing them the way that brings you the most benefit. You can incur ridiculous overdraft fees on debit transactions or ridiculous late charges on credit cards- there are negatives as well as the positives to each way.

    I would like to see more people really think through the use of credit, as I think that it’s not often a topic that people really think about. I’d like to see more people caring enough to debate the pros and cons.

  • http://www.greenandchic.com/blog Carla | Green and Chic

    When I had my debit card number riped off by a roommate almost ten years ago, it took longer to get all my money back from the bank than it would have if it was a credit card. Being that my debit card was linked to my checking account which had all the money I needed to LIVE, it really sucked for a while being cleaned out. Thank god for credit cards or I would have been up the creek…,

    I think credit cards are still very useful to hotels and car rentals. I don’t see the big deal with using credit cards for those type of purchases anyway. Plus they are a godsend for business – makes bookkeeping easier.

    I never run up balances and always pay they off each month. (shrug)

    • Erik Folgate

      it’s a valid point carla. It can take longer to get the money back from the debit card, but the point is that that you ARE protected, but it could be a little more of a hassle if it’s with a debit card.

  • Jen

    I don’t have any credit cards, not one. I just use my debit card, which in fact earns me points in my banks rewards program. Each year I earn a least a few hundred dollars in certificates and in the last few years I’ve never had a problem where the card wasn’t excepted because it was a debit card. For me using a debit card keeps my spending which trust me is a good thing :)

  • http://consciouslyfrugal.blogspot.com ConsciouslyFrugal

    “My point is that we need to stop focusing on how to effectively use credit cards and start focusing on how to increase our income, how to start spending less than we earn, and how to save wisely for the future.”

    PREACH! Beautifully said.

    The nearly fanatical dependency on and fear of living life without credit cards baffles me. I have literally seen people panic (and I do mean panic) over even the thought of parting with plastic. Hello, warning sign.

  • Skirnir Hamilton

    I would not panic over not having a credit card. But what bothers me is a person I know who has no credit card, no checking account, only a savings account. He has to monthly get a money order (actually I think 3) for paying rent, cable modem/phone and electric/gas. I just can’t help thinking of all the money he is wasting getting money orders every month. Here we have free checking accounts and you only pay for the checks. (3 a month, he could buy checks once every 5 years or so.) Yes, they charge fees if you overdraw, etc. and that is why he doesn’t have it. He doesn’t trust himself. If you can wisely use checking accounts and credit cards, I don’t see a fervent need to not own a credit card. Now, I do understand not having many. We have one in my husband’s name and one in my name and we each have the other’s card. That is it. No store cards, no gas cards, etc. Both have 1% back at least and no fees. My husband makes a couple hundred dollars a year on his, I only make about $50 a year. We are not huge spenders. And yes, our rewards is cash. No points, airline miles, etc. He requests his to pay down his next months bill when he wants to. I request a check when mine gets to $50 and I put it in my son’s college fund. Have we had to pay some to the credit card company? Yes. Once in many years I paid late and had to pay way too much. If I could find a card with a longer mailing period, I would probably switch. (I have two weeks from when I receive it in the mail to when they have to have it and you must mail it early or it won’t get there. Does not leave much time if you are on vacation, or if you pile it up until you get to the mail.)

    Debit cards, my husband tells me have gotten better to where they have almost the protection of a credit card. Would have to look up the rules. But a few years ago, the answer was no they did not. IE the earlier poster who said the person emptied out their bank account and how long it takes to get the money back. Apparently that has changed some though.

  • MarilynBr

    I’m almost 61, and I have never owned a credit card and never will. When I was 20, I decided that I would never do anything on credit except a house, a car, or education. I paid off my house a year early. Actually bought one of my cars outright for cash. Paid off all of my student loans in a timely manner. At present, I have absolutely no debt, and it feels great. Can I get everything I want whenever I want? No, but it’s rewarding to save for things over time and then be able to buy them for cash.

    I was talking to one of my friends about my “no credit card” policy. She said, “Oh, I could never do that because I’d never have enough money to live on without credit cards.” She was seeing her cards as another source of income and living beyond her means. Now that is much scarier than living without credit cards.

    • Erik Folgate

      Marilyn, I totally agree! You are a true testament to the kind of person I am talking about. You’re debt free at an age where being debt free gives you a LOT of financial security. Great job!

  • Sheila Anderson

    I beg to differ on your statement about car rentals and debit cards.

    My car broke down on the way from Boston to Montreal. It was a Friday night. No garage in vermont had the part I needed. The part was unavailable until Monday. I had no place to go in Vermont so I needed to find a way to get to Montreal. I made it to the Burlington airport, thanks to a shuttle van that stopped at the same garage, but none of the rental agencies at the airport would take my debit card without an $800 hold on the card. I had $300. Who travels such a short distance with more than that in cash? It was a weekend trip.

    I asked each car rental place that if I’d had a credit card would it have mattered whether or not I had $800 for them to hold. Each reply was the same: it didn’t matter how much credit remained on your cc as long as you had one.

    I don’t disagree about your other advise not to use a credit card, but know that in the case of travelling like I do up and back to Montreal, having a credit card, and using it / not using it wisely, is the way to go.

  • Karen

    If you have a handle on your spending, never carry a balance, and pay attention to your finances, I see no reason to not have a credit card. They come in handy when you find yourself in emergency situations and need a card for a car rental, airline ticket, hotel room, etc. Sure, under normal circumstances, maybe you could find a rental company or hotel that would take a debit card…but in dire circumstances, you can’t always be choosy. I would also suggest that when making purchases online, or in other situations where you may be vulnerable to identity theft, it is much easier for a credit card company to cover the fraudulent charges, at no hassle to you, whereas using a debit card makes the entire balance of your bank account up for grabs.

  • http://www.micash.net David Pratt

    Erik, great article, and you are right that a debit card with a Visa or Mastercard logo is accepted by most businesses that accept Visa and MC credit cards, provided there is a sufficient balance on the card. (As some people have commented, there are exceptions, but hopefully few and far between).

  • http://madsaver.com Mac

    I do agree that credit card aren’t completely necessary, as long as you have a debit card available (visa/mc) as it works in much the same way. I personally avoid using a debit card because I rather like the 30 day “buffer” before the money gets taken out of my checking account. It’s also nice to get all those nice airline miles I’ll never use! :)

  • Ben

    How long ago did you post this, this report would come in very handy when it comes to writing my essay on, why most americans should not use credit cards.

  • http://www.glazers.co.uk/ Accountants London

    its interesting analysis about fiscal matters is reflecting in this writing.

  • http://www.donnafreedman.com Donna Freedman

    Twice in my life I’ve been faced with serious family medical emergencies that made me VERY glad that I could race to the airport and jump on a plane (and, in one case, rent a car and drive another 60 miles). What made that possible was having credit cards.
    I like the rewards I get, but the convenience is what I’m seeking — especially if someone gets sick again. Just picturing people who proudly foreswear credit cards one day being in the position of having to say, “Yeah, I’m sorry Mom’s dying, but I don’t have enough cash to get there. Give her my best!”

    • Tonytiger41

      The article is aimed at the multiple cc holder who is living beyond his means.

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  • Matt

    The real answer is not avoiding them, but using them correctly. If always paid in full, credit cards are essential to building a strong credit score. Often times having no credit score is just as bad as having a poor credit score.

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