Credit card use is on the rise, according to the recent “State of Credit” report from Experian. But there’s a group of consumers who are bucking that trend: millennials, of whom increasing numbers are eschewing credit in favor of debit.
Problem.
Using debit and cash means you’re essentially opting out of the credit reporting system. Without a healthy credit score, you’ll likely pay more than you should for insurance and for auto or mortgage loans.
How much more? An average of $159,464 in extra interest paid over your lifetime, according to Credit.com’s Lifetime Cost of Debt Calculator.
My article on the Experian blog, “Credit or debit? Which one will save you $159k?,” explains the ramifications of using cash or debit exclusively. As credit expert Liz Weston puts it, “Your life is going to be harder and more expensive if you refuse to use credit cards.”
Since potential landlords and employers may also check that three-digit number, you could also be making it harder for yourself in terms of getting an apartment or a job. In addition, if someone hacks your debit card money can be taken directly from your account.
You’ll get the money back, but it won’t be quick – and if you live close to the bone, how will you pay the rent until that $200 (or whatever) is put back?
Should there be a questionable credit transaction, you can dispue it and not have to pay until it’s resolved. The credit company might even go to bat for you: A former co-worker had a health club billing him erroneously, and he couldn’t get the club manager to return his calls. He reported a fraudulent billing to the cardholder and guess what? The manager contacted him the very next day.
Do I think the current credit scoring system is fair? No, because it essentially penalizes people who pay cash. But it’s what we have to work with right now. As I pointed out in my article, avoiding it is like opting out of medical care because you think doctors make too much money.
In other words, the only person you are potentially harming is yourself.
Giving, and getting
Lately my freelancing has been all holiday, all the time:
“What to buy on Black Friday,” at Get Rich Slowly, sounds outdated but isn’t. Use the tactics therein to hit continuing holiday sales (and post-holiday sales) to take care of certain needs frugally throughout 2015.
Ditto my post on the GOBanking Rates blog, “Black Friday FOMO: Why we go overboard each year.” The psychological underpinnings of the day after Thanksgiving also affect the way we buy right up until the last store is shuttered on Dec. 24. In addition to the fear of missing out, we’re also triggered by sneaky ad campaigns, family pressures, subtle (or blatant) competition and, maybe, the fear that if we don’t get the right gifts then no one will love us. Keep these things in mind the next time you’re in a store.
To banish the seasonal stranglehold of buy-buy-buy, try a little give-give-give. It’s good for you. “Want to live longer? Give some money away,” at the Ally Bank blog, explains the physiological changes that charity brings. (Hint: They make us feel good.) It also references research that indicates, as one scientist puts it, “if you’re generous, and charitable and altruistic, you’ll live longer; you’ll feel more fulfilled; you’ll feel more expressive of who you are as a person; you probably will feel more control and freedom in your life.” Sign me up!
Good deals can be had right now for swimming pools and champagne. Who knew? “What to buy in December,” at Retail Me Not’s The Real Deal blog, also notes hot prices on toys and golf clubs. (But I repeat myself.) It’s worth noting that toy prices hit their lowest about 10 days before Christmas. I’d also like to point out that no matter how cheap champagne is, you shouldn’t try to fill that swimming pool with it.
I’ve used a debit card exclusively for the past 4+ years while on a payment plan. Once my credit cards are paid off and closed (4 months!) I plan to get 2 new ones (to use responsibly), primarily to keep my score high and for the reason you mentioned. When I return something, or there is an incorrect authorization on my account, I have my money held hostage for 3+ business days. With a credit card, that wouldn’t happen.
Yes. I was in a tweetchat recently with someone whose debit card was compromised. It took several months for things to be straightened out and she was down a whole bunch of bucks in the meantime. Seriously: If all you have is a few hundred extra to your name and that disappears, how could you keep the lights on? Brrrr.
I mostly use cash or a debit card. I find I spend more with a credit card as I don’t have to pay it straight away. Without a doubt the best option for me is cash as I am always more careful. I do feel safer using a credit card on line as it is held with a different company than my bank account and I feel in the event of fraud or theft it is safer.
Hmm…
You know, I am just not sold on credit cards. I would rather my children not use credit either and I wouldn’t encourage it in my millenial cousins.
The credit rating system is something that has developed over time to pick and choose based on human behavior. It continues to develop over time to be more sophisticated and better at predicting things. I would imagine an entire generation using significantly less credit than other generations would force the system to continue to develop. In other words, right now it would cost them more but that doesn’t mean it’ll be like that forever. Not to mention people who don’t use credit are paying for things by saving the cash. This includes things like cars and even homes. In many countries around the world, homes are bought with cash.
I think encouraging young people to use credit cards because of their credit is dangerous. I personally opened a credit card with this exact purpose and what a mess it led to. I know in numbers we like black and white but I don’t think this is one of those things…
By the way, have you seen this article yet? I’m curious to your thoughts on it: http://www.slate.com/articles/life/family/2014/12/linda_tirado_on_the_realities_of_living_in_bootstrap_america_daily_annoyances.html
I think the system doesn’t take everything into consideration, e.g., some people pay cash and are super-solvent so why are they bad credit risks? But what I also think is that this is the system in which we currently operate so you should position yourself as best as you can within it.
Credit cards don’t “lead” to messes. The way we use them does. Some people just can’t make the “I do have to pay this back” connection; others simply don’t care. Even the super-careful people who land in financial crises might overuse credit vs. finding other ways around the problems; as they say, when your only tool is a hammer, all your problems start to look like nails.
As for Linda Tirado’s book excerpt, my feeling is that it’s a good example of something I’ve mentioned over and over: that not having any resources (including credit cards!) can lead to paying more both for your own screwups and things that just happen to you.
Tirado herself? Well, there was a lot of backlash when people started noting that details in her initial poverty essay didn’t quite add up. So while I agree her book excerpt was a prime example of how people living on the edge are vulnerable to falling, I wish it were coming from someone whose professed experiences weren’t quite so murky.
http://reason.com/archives/2013/12/15/linda-tirado-and-the-politicization-of-p
(Note: I’m not a libertarian. I just thought it was an interesting read.)
I never use a debit card…I have heard horror stories of money being taken out in error. I use credit cards and have since I got my first job at 16 years old. I was taught at a young age the importance of good credit. I have also passed it on to my children. Credit cards if used right can make you money….I pay all bills on the credit card and make about $200-$400 a year and the bookkeeping system is great…they do it! I just had a big year with paying out for daughters wedding and the 0% interest for a year allowed me to use someone else money and slowly pay it back while my was earning interest 😉
When my daughter got engaged, she and I both got airline credit cards that started us off with bonus miles; during her two-year engagement we each amassed enough miles (counting the bonus) to buy them two plane tickets to Orlando for the honeymoon.
This holiday season I’m using rewards points to pay for a big chunk of my shopping. Credit card rewards + Swagbucks gift cards + a MyPoints gift card = less than $40 spent out of pocket. Whew.
Nice Job! You certainly can afford to give those gifts with a smile 🙂