Do You Really Need a Credit Card?

Do You Really Need a Credit Card? article image.

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Do you really need a credit card, or can you get through life paying cash for everything? It is possible to function financially without a credit card, but having at least one or two in your wallet is a good idea. Credit cards can provide emergency funds, help you finance big purchases and protect you from fraud. Using a credit card responsibly is also a great way to build credit.

What Are the Benefits of Having a Credit Card?

Credit cards can help you do a lot more than just buy things. Here are some other benefits of having a credit card.

  • Build credit: By giving you an opportunity to show how well you manage credit, credit cards are a useful tool to build credit. Most credit card issuers will report your payment activity and account information to the three consumer credit bureaus: Experian, TransUnion and Equifax. Because credit cards give you the flexibility to pay your full balance each month or just pay the minimum, they are a good indicator of how well you manage credit. When you make all your payments on time and avoid maxing out your credit limit, credit cards can help you build a solid credit history.
  • Rewards and sign-up bonuses: Rewards credit cards give you rewards—typically cash back, cash bonuses, miles you can use to pay for travel or points you can use for purchases—based on how much you spend on the card. For instance, you might earn a $500 cash bonus if you charge $3,000 on the card in the first three months after opening your account. Using a rewards credit card wisely can help you pay for travel or other purchases. Just be sure the rewards don't tempt you to spend more than you can afford or build up a big balance you can't pay off.
  • Purchasing power: Credit cards can provide a financial cushion to help you handle emergencies. For example, if your car needs an expensive repair and you don't have the savings to pay for it, using a credit card could get you back on the road quickly so you don't have to borrow from a friend or leave your car in the shop until you can pay for the work. A credit card with a 0% introductory annual percentage rate (APR) on purchases could help you finance big purchases, such as appliances, furniture or a vacation, and pay for them over the introductory APR period without accruing any interest.
  • Fraud protection: Using a credit card can provide more security than carrying cash or using a debit card. For example, if someone steals your credit card or card number and makes an unauthorized purchase, federal law limits your liability to $50, and many credit card issuers won't hold you liable at all. Card issuers may also offer cardholders other types of fraud protection, such as dark web monitoring for your personal information, virtual credit card numbers you can use to pay online, and contactless payments, all of which can help keep your card and your identity more secure.
  • Other protections: Paying with a credit card can help protect you in other ways. For instance, credit cards that offer extended warranties, or purchase protection for lost or stolen items you purchase with the card, can save you money and headaches. If you buy something with a credit card and the product shows up damaged, isn't as advertised or never shows up at all, you can dispute the charge with the credit card company to have it removed. Some credit cards also offer travel insurance or rental car insurance when you use the card to purchase travel or rent a car.

Debit Cards vs. Credit Cards

Credit and debit cards may seem the same—after all, both are plastic cards you can use to make purchases. However, there are some key differences between the two that you should understand.

Credit cards are a form of borrowing called revolving credit. When you first receive a credit card, the issuer determines an amount up to which you can borrow (your credit line). Each time you use the credit card, the card issuer pays the merchant and then adds that amount to your card's balance (the amount you owe). When your monthly bill is due, you can choose to make the minimum payment, pay more than the minimum or pay your balance in full.

A debit card is a way to make cash purchases without carrying actual cash. The card is linked to your checking account; when you use it, money from your bank account is transferred to the merchant's account. Payments occur in real time, so as soon as you make a purchase, your bank account goes down by that amount.

Fraudulent use of debit and credit cards is handled a bit differently too. If your credit card is lost or stolen and someone uses it to buy things, the charges are added to your balance, and you don't lose any money immediately. Report the fraud to the credit card issuer, and legally, the most you'll be liable for is $50. Many credit cards today have zero fraud liability.

Debit card fraud can have a bigger impact on your finances for a couple of reasons. First, the money leaves your account immediately—which can put you in a bind if, say, the rent is due and your checking account has been cleaned out. Second, you have fewer protections against debit card fraud. Here's how it works:

  • If you discover and report the fraud to the bank within two business days, the most you can be liable for is $50.
  • If you report the fraud after two business days but within 60 days, you can be liable for up to $500.
  • If you wait more than 60 days, however, you might not get any of your money back. In fact, if the criminal took money out of accounts linked to your checking account, such as your savings account, you may not get a refund for that either.

Even if you notify the bank of the fraud within two days, you'll need to wait for the bank to investigate before reimbursing you. In some cases, you could wait up to two weeks to get your money back. Keep an eye out for debit card fraud by checking your bank account online regularly, looking for any suspicious or unusual transactions.

Given the differences between the two types of cards, when should you use each of them? Use a debit card if:

  • You're worried about debt. For everyday purchases, like buying groceries, using a debit card can be a good way to keep your spending under control.
  • You're getting cash from an ATM. You won't pay any fees if you use your debit card at an affiliated ATM. However, if you use a credit card to get cash, you'll likely have to pay a cash advance fee of 3% to 5% of the amount withdrawn. What's more, interest begins accruing on the cash advance immediately, which makes this a costly way to get cash.

Use a credit card if:

  • You're trying to build credit. Because debit cards are cash transactions, banks don't report them to credit reporting agencies. As a result, using a debit card doesn't help you build a credit history or improve your credit score.
  • You're shopping online. Using a credit card to limit your liability for unauthorized charges can be a smart way to play it safe when shopping online.
  • You're traveling. If you're on a trip and want access to more cash than you have in your checking account, use a credit card to enhance your purchasing power. If you have a card that earns rewards on travel purchases, all the better.
  • You're making a big purchase. If you have issues with the item after you buy it, using a credit card enables you to dispute the charge and possibly get it removed.

Do You Need a Credit Card to Build Credit?

Although credit cards can help you build credit, they aren't absolutely essential to doing so. Here are some ways to build a credit history without credit cards.

  • Pay your bills on time. Payments on installment loans, such as car loans, student loans or personal loans, are reported to the credit bureaus, so making loan payments on time can help you build a credit history and improve your credit score.
  • Become an authorized user on someone else's credit card. Do you have a trusted family member who has excellent credit and is willing to add you to their credit card account? When you become an authorized user on their card, the account will be added to your credit report, and you'll benefit from the primary cardholder's credit score. Although the primary cardholder is ultimately responsible for all charges, you can build credit by using the card and making timely payments. For the greatest benefits, choose a card that's been open a long time and has a low credit utilization rate (meaning only a small percent of the available credit is being used).
  • Get a credit-builder loan. These unique loans, offered by credit unions, community banks and online lenders, are designed to help people build credit. When you apply for a credit-builder loan, the lender puts the loan amount into a savings account. You make monthly payments on the amount over six to 24 months, and payments are reported to the credit bureaus. Once the loan is paid off, you can access the money. Credit-builder loans generally range from $300 to $1,000. What matters is not the amount but paying it back, so be sure to choose a loan with manageable payments for you.
  • Sign up for Experian Boost®ø. This free service adds your on-time payments on utility, phone and streaming bills to your Experian credit report, which can help improve your Experian credit scores quickly. Normally, these payments aren't reported to credit reporting agencies.

Although the options above can help you build credit, there's another reason to consider a credit card: Your credit mix. Credit mix is an important factor in your credit score and refers to how many different types of credit you manage. If you have installment credit such as a student loan or car loan, getting a credit card will add revolving credit to your credit mix, which can improve your credit score.

If you're worried that having a credit card will tempt you to overspend, consider getting a secured credit card. A secured credit card requires you to make a deposit, typically between $200 and $2,000, that the issuer uses as collateral. Your credit limit is generally equivalent to your deposit. By using the card to make small purchases and paying your balance on time each month, you can improve your credit score. Eventually the card issuer may convert your card to a regular unsecured credit card.

Should You Get a Credit Card?

If you're not sure where your credit stands, get a free copy of your credit report and credit score. Once you have a credit card, use it for small purchases and pay it off on time each month to help your credit score improve. Then consider using free credit monitoring to keep an eye on the results of your credit-building efforts.

A good credit score can help you qualify for low interest rates and favorable terms on auto loans, personal loans, mortgages and more. Good credit can also make it easier to buy insurance or rent an apartment. Clearly, helping you build credit is just one way having a credit card can make life a little easier.

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