Why people avoid credit
Many people want to avoid credit because it can be tempting to spend more than you think. Personal finance experts like Dave Ramsey teach their listeners to eschew credit in favor of cash, saying things like, “Responsible use a of credit card does not exist.”
If you’re a reformed shopaholic or have impulse control issues, avoiding credit can be a good idea. A credit card is so easy to use and often comes with a credit limit of $8,000. Imagine how tempting it would be to spend $8,000 in cash on a new TV, designer wardrobe or exotic vacation.
In other words, avoiding credit isn’t necessarily always bad – but, in doing so, you’re giving up access to a lot of things that people consider necessities.
Here are some of the ways a credit-free lifestyle can backfire.
Travel benefits and perks
Traveling abroad might be possible without credit, as you can use cash to pay for items. The thing is, debit cards charge foreign transaction fees when you pay for items abroad and when you withdraw money from a foreign ATM, both of which can add up quickly. Many credit cards come with 0% foreign transaction fees. On a $2,000 trip, that adds up to $60.
Also, there’s a good chance you’re going to popular destinations and tourist spots where you can get mugged or have your wallet stolen. Incidents of distracted tourists being pickpocketed are common. But if you lose your credit card, you can call to get it canceled without being on the hook for any charges made.
However, debit cards are a different story. There’s less of a chance that you’ll get your money back. If somehow the thief gets access to your ATM code, they can withdraw cash directly from your account. Cash is also easy to steal and almost impossible to retrieve.
When you travel, you usually stay in a hotel, Airbnb or other type of accommodation that requires a credit card to hold the room. This is done because most hotels can hold the credit card information on file in case you destroy the room, take items from the minibar or purchase room service.
They can charge your credit card more easily than they could a debit card. If their policy does allow them to use a debit card, they might put a hold of double the rate on your card to cover any extra expenses.
Renting a car with a debit card is also extremely difficult. When you rent a car, you’re taking possession of an extremely valuable asset.
A credit card protects the rental company in case you get into an accident or otherwise damage the vehicle.
It’s not impossible to rent a car with a debit card. But they may do a credit check to see what your credit history looks like. If you truly have no credit, they may deny you or ask for a substantial deposit up front.
Buying a home or car may be more difficult
Unless you plan to buy a house in cash, you’ll need to apply for a mortgage to purchase a home. Unfortunately, few lenders will consider giving you enough money for a house if you don’t have a credit history.
If you don’t have a credit history, your only shot at getting a mortgage is an FHA loan. A FHA loan is backed by the government and designed for those with low salaries or credit scores. They’ll still ask for a down payment and private mortgage insurance on top of FHA fees. So in case you default, the lender is protected.
This makes an FHA loan more expensive than a traditional mortgage, which is one way that having no credit history actually costs you money.
You can buy a car easily with no credit, though you’ll have to pay in cash. Fortunately, it’s much easier to save for a new car than it is for a new home.
Your money isn’t protected
Credit cards are often demonized for encouraging people to spend more. But they also have benefits that debit cards can’t top. For example, if you go to a restaurant and spend $20 on a meal including tip and then log onto your account to find that the bill was $200, you’ll have a hard time getting that money back.
The reason is simple: when somebody hacks your credit card, the credit card issuer’s money is on the line.
They’ll work hard to rectify the situation and ensure that you’re not responsible for paying the amount. Because it’s their money, they care more about the problem.
With a debit card, it’s only your money that’s at risk. When there’s a fraudulent transaction, the bank has little reason to fight for you. If you shop online frequently or use ATMs at shady gas stations, you could be at risk for losing hundreds or thousands of dollars.
It’s harder to rent a home
Most landlords run a credit check on you when you fill out a rental application in order to determine if you’ll be a good tenant. A credit check shows any previous incidents such as evictions, late payments and more, so it’s crucial to have a credit history. In a hot housing market such as San Francisco or New York, finding an apartment with no credit history is close to possible impossible because there are so many other qualified tenants.
You can try to find a landlord that doesn’t run a credit check, but often you’ll have to pay a larger deposit upfront. You can also ask for past landlords to serve as a reference.
Employers in many industries run credit checks on potential employees to ensure they’ll be a trustworthy hire. This is especially true for positions that involve the handling of money, or will otherwise require a financially responsible employee.
Having no credit history could disqualify you right out of the gate.
Again, this is an example of credit’s usefulness as a gauge of how responsible someone is. Being financially dependable is all well and good, but it means little to a prospective employer if you can’t prove it. Think of it like a passport – you can live your whole life as a respectable citizen without one, but you’ll need to show it if you want to enter other countries.
High insurance premium
This one is only theoretical – for now. Recent research indicates that your credit score can be a reliable indicator of how likely you are to get into an accident, or otherwise find yourself in a situation where you’ll need to make an insurance claim.
That means car, homeowners, health and life insurance companies could very well start factoring credit scores into the rates they offer customers. Having a poor credit score could lead to much higher premiums – having no credit at all could push that through the roof, or even render you ineligible for certain plans.
The bottom line
Using a credit card might seem like you’re giving into a consumerist-focused lifestyle, but in fact, it can be much cheaper to use a credit card. You can avoid ATM fees, challenge unfair charges, and be able to travel without worrying about finding a hotel that accepts a debit card.
Think about your credit as a necessary evil, like getting your tires rotated every few months or going to the dentist. No one wants to get their teeth cleaned or wait for their oil to be changed. It’s not fun, but if you do the work now, you’ll save yourself a lot of money, time and hassle in the future.