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Should You Avoid Credit Cards Altogether?

By: Motley Fool
Posted: 2/8/2014 1:00:00 PM
Referenced Stocks:

Using a credit card may start out as a convenience. Too often, though, it quickly turns into a way to pay this month's bills with next month's pay. Come next month, there's not quite enough to pay the balance, so it carries over to the next month. The interest starts piling on. Next thing you know, you owe thousands of dollars in credit card debt and can't seem to find a way out.

Even when people do everything else right, their financial lives can be ruined by heavy credit card debt. It makes us wonder if we'd be better off without credit cards altogether.

Life without credit cards
Getting rid of credit cards can give you a great feeling of freedom. You can chop them up ceremoniously with a giant pair of scissors, melt them over a fire, or just give them a toss. (Don't forget to call the credit card company and actually cancel the account, though.) No more credit card bills, no more temptation to spend more than you make.

That's all great -- until you try to travel or buy something online.

When you travel, hotels and car rental agencies generally require a credit card. Yes, you can use a debit card instead. However, beware of so-called "security holds" on your card. The merchant can put more than the amount of your actual bill temporarily on your debit card in case you have extra charges. Unless you keep a substantial balance in your checking account, you may not be able to use your debit card because of the hold -- a major inconvenience when you're away from home.

A credit card can also be a lifesaver if you have an emergency, either at home or while traveling. It would be great if you always had a ready fund to cover car repairs and other emergencies. Life doesn't always work that way, though, especially if you have more than one emergency in a row. It's better to go into debt in the short term than to be stuck by the side of the road with smoke pouring out of your hood.

You can use most online sites to shop without a credit card, typically by using PayPal, Merchant INC, or similar services. However, a credit card certainly makes shopping online easier. Credit cards also generally provide you with consumer protection for your purchases.

No credit cards = little or no credit history
For many people, credit card accounts are their main source of a credit history. That credit history is how you prove to potential lenders and other people with whom you want to do business that you can handle financial responsibility. If you've chucked all your credit cards because you don't trust yourself with that much financial responsibility, how do you expect to convince anyone otherwise?

Even if you never apply for another credit card or car loan, you could still need a credit score to buy a house, take out a business loan, or get into an apartment. Increasingly, potential employers ask for credit scores. It's a little late to try to get a credit score if you wait until you need one.

Credit cards without fear
You can have the convenience and security of credit cards without worrying about going into debt. Here's how:

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