When 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Reduced Risk of Identity Theft. People who do not have credit cards may have a reduced risk of identity theft.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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?