Personal Finance 101: Why Do I Need Credit At All?

Samantha writes in:

I don’t understand why I need credit at all. Credit just gets you into debt and you wind up paying interest to other companies. What’s the point of throwing my money away like that?

pf101Samantha asks a really good question here – and in some respects, she’s spot on. Poor use of credit is a big net loss for people. Because of the interest payments, you lose far more than you gain.

However, there are a lot of upsides to healthy use of credit.

The Benefits of Having A Good Score

1. A good credit rating helps your insurance rates.

Insurance companies use your credit rating as a factor in determining what sort of rate to offer you on homeowners insurance, auto insurance, and life insurance. The higher your credit rating – meaning the more reliable you are at obtaining credit, then paying the bills faithfully – the better you seem as a risk, because people with high credit are statistically more likely to be safe drivers, safe homeowners, and likely to live longer.

2. A good credit rating helps you with employment options.

Similarly, many employers run credit checks on potential employees and, again, are much more likely to hire people with strong credit because it’s a clear indication that they’re reliable.

3. Credit often offers great buyer protection.

If you use credit to make a purchase – particularly credit cards – the cards offer a lot of protection against fraud, identity theft, and other serious problems. If you pay cash, you miss out on those protections.

4. A good credit rating helps you with renting.

Even if you’ve made the decision to entirely avoid credit and rent until you can write a check for a home, your credit still affects your housing because many landlords – particularly those in charge of higher-end housing – will check the credit ratings of potential renters and will reject (or charge a much higher deposit) people who have no credit or poor credit.

In the end, it pays to have a strong positive credit rating. This does not imply, however, that it’s good to be in debt. You can have a great credit rating without digging yourself into debt. Here’s how.

How to Gain and Improve Your Credit Score

1. Get a credit card.

If you have no credit history, you can usually get one with a low credit limit pretty easily. Look for one that has some sort of bonus connected to a retailer you use. If you shop at Target, get the Target Visa. If you shop at Amazon, get the Amazon Visa. If you get all your gas at BP, get the BP card.

2. Use the credit card for routine purchases.

If you stop for gas, use your card and pay at the pump. If you’re at the store buying some items you need and would buy normally, use your card for that routine purchase. Other than these events, forget about the card entirely.

3. Pay off your bill in full each month.

If you stick to just using the card for routine purchases, you should have no problem whatsoever paying off your entire bill each month. Thus, you never incur debt that generates interest.

Instead, you get all the benefits of a positive credit rating – lower interest rates, better job application success, buyer protection on some purchases, and better housing opportunities – plus the benefits of the rewards of a good credit card – discounts at the retailers you already use. Together, these add up to a net positive, and if you’re disciplined enough to keep yourself from using the credit card for purchases you would not make without it, it’s nothing but a positive.

Here’s another way to think about it. Your credit rating is simply the method many businesses use to figure out if you’re reliable or trustworthy. If you are, they see you as having more value – you’re likely to be a better employee, you’re less likely to have insurance claims, and you’re more likely to pay your rent. By avoiding credit, you’re sending no signal at all to them – and thus they’re unable to decide if you’re reliable or not and thus won’t offer you the best rates.

Positive credit helps you in many ways and saves you money consistently. Don’t avoid all credit because of a fear of debt – responsible people can enjoy all the benefits of good credit without the drawbacks of bad debt.

Good luck.

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  1. I call it the Dave Ramsey Paradox. Though I like the guy the idea you don’t need credit is awful. For ANY situation in which you need to make a monthly payment you need good credit. It’s not just for loans.

    Trent touched on a good point with employment. Your manager wants to make sure you’re not in any kind of financial trouble that may cause problems at the company. One of the biggest reasons for imbezzlement is financial trouble.

    I used to work for a background check firm and outside of the normal criminal searches the credit report was one of our most popular products.

  2. Jonathan says:

    Here’s a trick I use for credit card purchases. I have a savings account at ING setup called “credit cards”. Whenever I make a purchase, I transfer the money from my checking to savings (I use ING for checking, too, so it happens immediately). Then, when the bill comes due, I transfer the money back and pay the credit card off.

    It’s a little chore, so it’s not for everyone. But for me, it helps to see how much I’m spending on credit each month. I love stocking up credit card points, so I try and use my card as often as possible. That might be a huge pitfall for some people, so use with caution.

    Hope that’s useful for someone!

    -Jonathan

  3. Wendy says:

    I am 53 and retired. Everything we own – house, vehicles, travel trailer and toys – is owned by US and not the bank. I’ve used credit cards since my mid-20′s and have paid about $20 in interest in all those years (hey, even the best of us forget to pay a bill once in a while!). We use credit cards for our routine purchases and next week I’ll get $150 off the fridge I’m buying on sale because of award points. We’ll use the reward points we get from that transaction when we replace the dishwasher. And I wouldn’t leave the country without a credit card to guarantee my flight home in case of emergency.

  4. gerry says:

    kind of funny, if you research the polls asked of millionaires they will tell you they don’t use credit. Why do companies like microsoft, and cisco have large cash reserves, and don’t use credit? We have been snowballed into believing we need credit to live. I would rather be debt free and pay a slightly higher premium for insurances. I am sure if you crunch the numbers, the total interest you will pay for being in debt will far surpass the amount of money lost on insurance premiums. Our culture needs to wake up, and start thinking for themselves. If i have to hear one more person tell me i need a credit card to rent a car, or i need good credit to keep my job i am going to vomit. I have no credit, and i have a great job, plus i can rent a car with my check card. Kinda funny, my auto insurance is lower than my friends because i have an emergency fund which allows me to have a higher deductible on my car i paid cash for. so you still think you need credit?

  5. Great points Trent. It just shows how credit is intertwined with life in the U.S. today. The sad part is that credit (esp. credit cards) barely existed 50 years ago and now it is so important. We the people were duped by the companies selling the ability to achieve the American dream quickly buy borrowing money (and repaying much more than was borrowed.) Other industries like insurance and apartment rentals jumped on the credit score bandwagon to reduce the due diligence they have to do to get good customers and appropriately charge extra for the not-so-good customers. Bigger profits for them and they just have to pay a comparatively small amount of money to the credit bureaus. Now, credit is taking even more of a strangle-hold on Americans; turning the country into a two class society, those who own and those who owe.

    A massive campaign to educate people from the upper middle class down to the working class and poor would be needed to make a change. It would cost a great deal of money and have only a small chance of working, since credit satisfies the “I want it now” desire. It’s hard to fight against that in a population of 307 million born into the “I want it now” environment, reinforced everyday by the bad habits of those they know.

  6. I think these are just prejudices, and it seems something is wrong in the Usa… Italy is far behind in many fields but the idea of judging people on credit might be… forbidden by the constitution… A journalist, Severgnini, once wrote a book Un italiano in america where in a chapter he explains the difficult of living in Washington DC without a credit card, nearly impossible to obtain until he did a “conversion” of his european one. To have credit, you have to make debit? Nonsense.

  7. Debora says:

    I am always horified to read that in the US you need to use credit to get a good rating. It seems bizarre to me that someone who has used credit can get a mortgage easier than someone who has always managed her / his finances perfectly and hasn’t needed credit.
    I sure am happy it doesn’t work like that here.

  8. Aaron says:

    This just kills me. I have to conclude that any thinking person would look at someone with a good credit score as a reliable chump, with a bad credit score as an unreliable chump, and with no credit score as an unknown. It boils down to having to pretend that you’re a reliable chump to get some services to deal with you.

  9. KC says:

    When I moved recently I was surprised at how many utilities wanted to run a credit report on you to provide you with service. Since we had good credit we basically had to put no money down to hook up any of our utilities, which was nice. I’d always thought that credit was mostly for loans and such. I knew it could be used in job situations, too, especially those dealing with money. But I had no idea how many companies use it to determine if you need to make deposits on your service.

  10. Sandy E. says:

    I believe Dave Ramsey was arguing that you don’t need credit cards, and so to eliminate some confusion here, the distinction needs to be made between the 2 main types of credit – secured and unsecured. Secured credit uses some form of collateral to secure the loan. You have to sign the title of an asset (car, home) to the lender in exchange for the loan, and when it’s paid in full, you get your Title back. That reduces the risk for the lender, so you usually get a lower interest rate.

    Unsecured credit, which is what Dave Ramsey opposes, would be charge cards and department store cards and the like. With those, you aren’t backing up the loan with any collateral, so the interest rate is usually much higher, and you are a greater risk for the lender. So Ramsey doesn’t have a charge card and makes airline reservations, car rental reservations, etc. with his debit card. As he says, the beauty of those is that you can’t get in debt with them.

    I’ve given it a lot of thought re credit cards and their award rewards, and I’ve concluded that like the statistics have shown, and what Ramsey points out, is that a person typically will spend more (was it 18% more? – can’t recall) using a credit card than if they did not. So the argument there could be that even those people who pay off their credit cards every month, may be purchasing more monthly using those cards than if they just used cash. The reward points are perhaps subconsciously encouraging them to spend more and the credit card companies are winning when you compare dollars spent to reward $ issued.

    Now as far as establishing credit, just doesn’t seem right that a young person has to do that by opening up a charge card in the first place.

  11. joey says:

    Let me tell you about credit. I never got in debt and saved a lot of money working in my 20s instead of spending like my friends. They were broke and bought homes with no-money-down. I did the responsible thing and put a huge 20% downpayment. The broke friends couldn’t afford their homes so they walked away with damaged credit. Did they lose money? Nope. My hope plummeted in value and its my downpayment that gets lost first. Therefore, I couldn’t try a short sale because the portion of the bank loan was still intact. OTOH, my stock portfolio plummeted because of the people defaulting on their homes sent the banks into turmoil. I got it up the ass in both ends for being a responsible person. The moral – run into debt and get away scott-free. Save and invest your cash and you are at the mercy of all the morons out there.

  12. Damester says:

    Practically speaking, if you travel, buy things online, for example, you need to use a credit card, at the least, to protect yourself if there are problems with products, etc.

    Can you use a debit card? Yes in many cases but you lose a lot of consumer protection in the process.

    Plus, if you use a debit card for say a hotel stay, you can find yourself losing access to a lot of money, provided you even have it, in the account linked to it. Why? Hotels put a “hold” for an amount that is usually a lot above the cost of your room/tax to protect themselves. It’s one thing to do that on a credit card, where you may have this amount “available” in your overall limit. But it could be a real problem if you are using a debit card.

    it is ridiculous that you need a credit card even if you want to pay with cash, but you do. (Pay cash to buy airline tickets these days and you find yourself on a security watch list!)

    If you think you have problems with a credit card with false charges, etc or returns, it’s a lot worse with a debit card.

  13. kitty says:

    “kind of funny, if you research the polls asked of millionaires they will tell you they don’t use credit. Why do companies like microsoft, and cisco have large cash reserves, and don’t use credit?”

    Your information is wrong – both regarding the companies you mention and millionaires:

    1. Microsoft has just issued bonds (i.e. borrowed). It hadn’t issued bonds before, but it did now. It also was planning to issue bonds to buy Yahoo before the purchase fell apart. Cisco has just sold bonds as well (http://www.bloomberg.com/apps/news?pid=20601087&sid=a8V6thZou5YM)

    Most businesses use debt to expand as well as short term loans in-between the time they have to pay for expenses and the time they get their revenues. Sure a few retailers manage without it, but their business is often more predictable.

    2. Are you a millionaire? My net worth is around 1 million, and guess what – I do use credit cards. As Wendy above, I pay my balances in full every month, but I have used credit cards for over 20 years, and I am not doing that bad considering that I had no money at all when I started working. All I have are money saved, no inheritance; it’s also in spite of some stupid investment decisions. Now, I do need to include my paid-off home value to get to a million so I guess this technically means I am not a millionaire. But I know several families with over a million in investible assets. My friends, for example, have several million dollars without home equity. Guess what – even though they could have afforded to pay cash for their vacation home, they took a mortgage. They also financed a car (Honda Civic Hybrid) even though they could’ve paid cash. Their reasoning: they strongly believe that in a few years we’ll have large inflation and a low fixed interest debt is a hedge. I.e. they can earn more on their investments (and not just stocks, if fact they mostly got out of the market in 2007) now or in future. They use credit cards too, in fact every millionaire I know does. Super rich certainly use credit cards too – why do you think they have “black” credit cards?

    Also, being debt-free is a bit of a misnomer. I have no mortgage, or car loans or equity lines of credit or credit card balances, so you can say I am debt free. But I still have to pay taxes, so I owe money to the government. I have to pay my condo association dues, so I owe them. I use electricity/gas/phone before I get the bills, so technically I borrow energy/phone for a short term.

    Credit is everywhere. When you put money in a bank you lend your money to the bank. The bank then lends it to others.

    Credit is part of running a business, but for an individual it is often an investment strategy. When a stock trader shorts a stock, he or she borrows stock, for example. Taking a loan vs paying in cash if you have money is also an investment decision based on whether or not you can make more money elsewhere and at what level of risk. Now, credit cards normally carry very high rates, but if you pay in full, it’s an interest-free short term loan. I sure take advantage of this.

  14. Sarah says:

    The other problem with paying for things with a debit card is that if the company overcharges you, you are stuck for some nonzero period of time with that money of yours simply gone. Meanwhile, your regular checks, etc., are going through. Could you manage if an expense that was $200 was charged as $2000 and it took you a month to get the money back? Is there no point in your monthly cash flow where that kind of error might cause a check/scheduled payment to bounce?

    Minimizing the number of people who have direct access to your checking account strikes me as the single strongest argument *for* credit cards. Companies are incompetent. Companies are corrupt. You can’t tell who will screw you over until it’s too late.

  15. Sarah says:

    The other problem with paying for things with a debit card is that if the company overcharges you, you are stuck for some nonzero period of time with that money of yours simply gone. Meanwhile, your regular checks, etc., are going through. Could you manage if an expense that was $200 was charged as $2000 and it took you a month to get the money back? Is there no point in your monthly cash flow where that kind of error might cause a check/scheduled payment to bounce?

    Minimizing the number of people who have direct access to your checking account strikes me as the single strongest argument *for* credit cards. Companies are incompetent. Companies are corrupt. You can’t tell who will screw you over until it’s too late.
    OH! You’re my new favorite blogger fyi

  16. Sara says:

    I had similar objections when my parents advised me to get a credit card to build credit almost 10 years ago. They gave me the good advice to pay off the full balance every month so I wouldn’t have to pay any interest, but it still seemed like a hassle to pay the credit card bills rather than just using a debit card to pay directly out of my checking account.

    I still took their advice, though, and started using a credit card for all my purchases, paying the full balance every month, and I built up a pretty good credit rating without ever going into debt or paying interest to the credit card companies. Most credit card companies have online bill payment, and even allow you to pay the bill automatically so you don’t have to worry about forgetting it (you should still look at the statements, though, to make sure there aren’t any fraudulent charges). I definitely agree that if you use credit cards responsibly, they can be beneficial in many ways.

  17. kitty says:

    @Sandy E. (#7): “I’ve given it a lot of thought re credit cards and their award rewards, and I’ve concluded that like the statistics have shown, and what Ramsey points out, is that a person typically will spend more (was it 18% more? – can’t recall) using a credit card than if they did not. So the argument there could be that even those people who pay off their credit cards every month, may be purchasing more monthly using those cards than if they just used cash. ”

    Sandy, I think you are making the same mistake in your interpretation of statistics as most people who aren’t statisticians. Statistics may have shown that “people spend more on the average when they use cards”, but it is not the same as “a person is likely to pay more”. For example, I can say “on the average, women gain weight after the menopause” and it will probably be true. But I am sure, you can find plenty of women who haven’t gained any weight at all. “true on the average” doesn’t mean “true for an individual”.

    Same with credit cards and spending. What the statistics may have shown is that if you take 100 people who use cards – by the way, it was all cards debit and credit vs cash – and 100 people who don’t, the total amount of money spent in first group will be greater than in the second group. But this doesn’t mean every single card user spends more money than he or she would’ve otherwise, only that the average amount of money spent for a group of people is higher.

    What we do know is that over 50%, maybe even as much as 70% of credit card users carry a balance. This means that 70 people of the 100 in the example above certainly spend more than what they would have without cards. So if you take 100 people where at least 70 spend more money than they would’ve without cards and the remaining 30 spent about the same then you’d get “people who use credit cards spend more”. But it doesn’t show that people who pay their balances in full do. Some of them – maybe, and I am sure you can give an individual example of someone you know who indeed pays in full yet spends more. But then there are those who actually spend less with cards because “cash burns wholes in their pockets”.

    There was not a single study that specifically looked at credit card users who pay their balances in full. Therefore, there is no evidence at all that this particular segment of population spends more money when they use cards.

    With all due respect to Dave Ramsey – he is not a mathematician or a statistician. In fact, based on what he says, his math knowledge is pretty poor. I am sure he helped a lot of people get out of debt, but once you get beyond basic common sense things like living within your means and saving money, his advice is pretty poor. His investment advice is actually quite bad.

    BTW – there is this one great option that credit cards have that make them similar to debit cards, but still preserve their advantages. It is called “automatic payment” of the full balance. Most credit cards have this option. If you use this option, psychologically it shouldn’t be different from debit cards: in both cases you know the money will be taken from your bank account. The only differences are the timing i.e. immediately or on the due date. But with credit cards you’ll have a chance to see your bill before the money is taken and stop any payment on a suspicious charge. Or even put a stop payment on a payment to a merchant that failed to deliver or a contractor that didn’t show up.

  18. Joe L. says:

    There are a lot of ideas bouncing back and forth regarding why we should purchase in cash or in credit. I agree that credit cards are really convenient and a good credit score opens opportunities but if you missed paying your bills you will get in trouble so it entails strong control in spending. I don’t know the statistics that surrounds credit card but I would say that almost all (if not all) of my friends including myself carry a balance in our credit cards. So it’s good business for the banks.

  19. The secret to credit is to use the lender instead of allowing them to use you! Use their money for free by paying off balances in the grace period. Build your credit score at the same time . . .

  20. Doug says:

    Two things. If an insurance company wants to charge me more money because I no longer have a credit history, I think that’s a good enough reason to go get a new insurance company. Thus far, that fact has kept my rates from going up (at least as far as I can tell).

    As for the credit check for a job, if a company is stupid enough to want my credit score for a non-financial job, they I don’t particularly want to work for that company. Something tells me that if they make decisions without looking at the details, I really don’t want to work for them.

    A funny, totally unrelated point. When my wife and I got a loan for our new house, we discovered that I had a higher credit score than she did, despite me not having had a credit card or a car payment for over two years. So I don’t buy arguments that purport to show I need a credit card. But, to each his/her own.

  21. kitty says:

    Joe L. (comment #13): why are you carrying a balance? Is it because your salary doesn’t cover necessities? medical bills? or to buy nice things that you cannot really afford or eat out? I just don’t understand it, have never understood it, and I have been poor too. Do you realize how much money you are throwing away every month?

    As to credit cards being good business – it is not such a good business as it used to be which is why banks are trying to reduce it. Why do you think they are cutting limits and closing inactive accounts if this were such a good business? After all, lower limit = less money borrowed = less interest, right?

    One thing that you may not realize is that certain percentage of customers default on their loans. Currently because of the economy this rate is over 10% and is climbing.

    Imagine you want to invest a bit of your money into loans. Let’s say you lend a $1000 of your own money to 10 people at $100 each as an investment. Let’s say you believe that one of the borrowers will default i.e. will not return you the money. Calculate the percentage you need to charge from your other borrowers (i.e. to get $100 in interest on remaining $900) just to cover your loss without even making you any money.

    Now imagine that this is borrowed money i.e. you pay small interest on it e.g. 1% much as bank pays on deposits and that you are in this business full time and have some business expenses e.g. rent or salaries. So the interest you charge has to cover a) the losses b) your business expenses such as the interest you pay or salaries if you have employees c) bring profit. Figure out how much interest you need to charge.

    This is a bit simplified – I didn’t consider fees or reserve requirements or grace period or customers that pay their balances in full and hence don’t pay any interest. But this exercise should give you an idea about this business.

    Now imagine you want to do what insurance companies do and charge less interest for those customers you think are less risky and more from those that are riskier. You figure out some criteria as default or late payment elsewhere or risk of a job loss, etc. Let’s say you believe that in a particular subgroup 20% or 2 people out of 10 will default. Which interest would you need to charge remaining 8 then to break even?

    Would you like to be in this business?

  22. Hogan says:

    Remember our children rebel if we are too cheap. Being cheap in front of our children I think is a balancing act, if you obsess so much about things especially in front of them they are going to do the opposite.

  23. frugal momma says:

    You forgot one of the best benefits of having a credit card! Assuming you pay your balance in full every month…you are getting an interest free loan for about 30 days, meanwhile the cash you’re going to use to pay your balance with is earning interest in an account. And if your card has a cash back feature, you are really earning money! To me that’s a no brainer as to why you should use a credit card. But I would avoid a credit card all together if you don’t have enough self-discipline in spending–because all you’re positives you listed won’t matter if you can’t pay your balance in full!

  24. Mark says:

    Again this is so weird from the European perspective. You HAVE to get in (“good”) debt in order to be seen as reliable and trustworthy in the US society? Just looks so weird to me.

  25. Tordr says:

    This article misses the point:
    The original question was why we need credit.
    The article talks about credit rating and why you need a good credit rating. That misses the point totally.

    You need credit, because you have potential, but you need capital to now and cannot wait until you have accumulated it.

    If we did not have credit, you would have to wait until you had the cash on hand until you could buy your own house or anything else.

    So think about it, you could not have bought a house until you had money enough to buy it outright. Being 30, having a good job and excellent prospects for a well paid career would not be enough. The seller would only accept payment in cash. So at an age of 50 you would finally have enough to buy the house, but where would you have lived from the age of 30 to the age of 50?

    In the same way, if you had an idea for a company, had the contracts ready, had suppliers and buyers lining up to buy your product. It was the perfect business and you would have made millions in the first year alone. But if there was no credit, and the upfront costs of equipment was 1 million. Then you would have to give up your dream, because getting that 1 million in upfront costs take you a life time to save up, and then the window of opportunity was gone. Or maybe you would have to sell it all to someone for 100.000 only because they have 1 million sitting in the bank and you don’t.

    The banks have the money and you have potential in paying the money back. Therefore it makes sense for the bank to lend you money (credit).

    Having to pay interest is another thing, many religions view it as illegal or as a sin. And our current economic mess was made possible buy giving credit to people who where not able to handle such amounts of credits, and then forcing them to pay extraordinary amounts of interest. Credit has also been seen as some sort of slavery. You are giving up your future and end up paying more for the things you want now. The only thing that makes the bank have such power over you is that they have money and you don’t.

  26. Simona says:

    In some countries in Europe there a similar systems about credit ratings, but data are better protected normally.

  27. Strabo says:

    “kind of funny, if you research the polls asked of millionaires they will tell you they don’t use credit. Why do companies like microsoft, and cisco have large cash reserves, and don’t use credit?”

    They do use lines of credit. Every time they can borrow money for less than they would earn with the same amount of money in their investments they rather borrow the money than to liquefy already invested money.

    It’s easier for companies like MS or Cisco to keep a stable amount of liquid money, but even they try to keep it as small as possible to keep the RoI as big as possible (money kept liquid usually doesn’t generate much money).
    Since they sell many small things to many people, generating a more constant stream of income. Other companies (even completely healthy ones) which rely on few customers paying huge sums for long-term projects on the other hand often need to borrow money until the customers pay the money. That’s why the biggest part of the global credit market is short-term loans to healthy companies, especially small companies.

    Borrowing money is done for different reasons by rich people and companies compared to us “small people”.

  28. ChrisD says:

    Now as far as establishing credit, just doesn’t seem right that a young person has to do that by opening up a charge card in the first place.

    A good credit report says: ‘this person always pays their bills every month. They are responsible and can manage their money’.
    That is important information to have, even if it can be often flawed as someone who is getting into debt but keeping up their minimum payments will presumably still look good.

    Remember to get a good credit rating you don’t need to get into debt. If you are paranoid, you could actually pay a small amount in advance, so the credit card is in credit, then spend an equally small amount. The credit scores only notice ‘late payment’ versus ‘on time’ payment. The amounts are irrelevant.

  29. Lenore says:

    No, no, no, no, no, no, NO!!! You can do everything you need to do with a DEBIT CARD and not get sucked into the temptation to spend beyond your means.

    For years I used credit cards wisely, paying them off every month and taking advantage of rewards programs. Then I started playing the balance transfer game because it seemed like I was making money off them. In the end, I owed over $20,000 and had to file for bankruptcy.

    Credit card companies use seductive and sneaky tactics to get their card holders into debt because that’s how they make their profit. They loathe customers who pay their balance every month, actually referring to them as deadbeats. I would no sooner get another credit card than I would walk into a casino with my life savings or buy a pack of cigarettes just to see if I like the taste.

    Life takes Visa? No, Visa takes life!

  30. Kevin says:

    @Lenore (#21):

    “You can do everything you need to do with a DEBIT CARD”

    I’m not sure that’s correct. Can you book a hotel room with a debit card? Order a book of Amazon.com? Rent a car? Earn cashback benefits?

    “Credit card companies use seductive and sneaky tactics to get their card holders into debt because that’s how they make their profit.”

    No, that’s incorrect. I think you might be confused about how credit cards work.

    The credit card companies don’t make a nickel off interest. They don’t care whether you’re in debt or not. You’re thinking of the BANKS. The banks are the ones who lend you the money and who charge the interest.

    The credit card companies make their money off transaction fees they charge merchants. That’s it. They don’t set the interest rates, nor do they collect the fees, interest, or anything else. They provide the network infrastructure, the reward programs, and other logistical framework, but they don’t set the interest rate for your card.

    If you default on your Visa, you’ll get a letter from the bank, not Visa. Visa doesn’t care if you miss a payment. They just care that the merchant pays the 3% fee if you used your Visa to buy your groceries.

  31. It’s all about being frugal, the world seems to have changed from a saving up state to a pay later (if possible state).

  32. Georgia says:

    I once worked at a Savings & Loan. The only money we made was on home and installment loans. With that money, we paid a slightly lower rate on savings. That said, we checked your credit report to see how you paid your bills. If you paid on time each month and did this on well, you were a good credit risk for a home loan.

    But, say you had gotten a car loan from us, paid monthly for 3-4 months and then paid the loan off entirely, we would drop you down on the consideration list. As my boss said, paying a lump sum did not mean you had it on hand or saved it to pay your bills. It could be a bonus from work or a gift from family. This did not give a good history of your month to month payment history.

    We were not like banks and have other forms of income. If you did not pay on time monthly, we could not pay our bills on time and monthly.

    Which is why, when we were in cc debt of over $34k, I had a very high credit score. Even if I borrowed from one card to pay another, I made my monthly payments on time. Therefore, I got all the good cc offers. At the time, financial sites said if you could get your credit down to 14% you were ahead of the game. Well, I had received 3 offers for 9% interest on transfers, until they were “paid off.” Later that went down to 4.5% on another card & I was able to combine all my debt on one cc. On that transaction I made a mistake and had the bulk at 4.5% and the last $1k at 16.5%. But, the average still worked out to less than 6%. Then, the last 3 years I got the transfers for 0% interest for 1 year. It was hard work, but I got it done.

    Now I have 2 cc’s and I use them on practically everything I buy and pay them off on line each month. I didn’t set it up to be automatic, because the amounts are different each time and I want to check the charges before I tell them to take my money. I usually check within 2 days of the closing date and then set up the payment for 3 days before due date. Works great.

  33. Sean says:

    I like a lot of what Trent writes, but we do not see eye to eye on consumer/credit card debt and in this case he is presenting possibly damaging half-truths for the sake of a “fair” (2 sentences about why they are bad and 5 paragraphs about the positives of credit rating) blog post.

    Additionally, many of his arguments are misleading or simply false! As are many of the comments that I think are trying to support the use of credit cards.

    In my opinion Samantha has it right…the use of credit cards should make all of us stop and think, WHY DO I NEED ONE? My advice to this young lady is to avoid credit cards like the plague they are!

    What plague…$930 billion in credit card debt, record bankruptcies, and a belief system that we “need” credit cards!

    I am 45 years old and have not “owned” a credit card for the past 10 years, and have not used one for the past 13 years. I don’t have a clue what my credit rating is and don’t care.

    1. I tried to call a friend in the insurance business before I left a comment but could not get a hold of him. I have a hard time believing that NO credit rating will penalize Samantha. I agree with Gerry and Doug, find another insurance company. I have personally compared our rates to friends and we are more than competitive.

    2. I love Marks perspective, “You HAVE to get in (”good”) debt in order to be seen as reliable and trustworthy in the US society?” How can anyone living in the U.S. say YES to his question, but that is essentially what is being argued.

    Trents comment is NOT accurate or true!! There are millions of great jobs that do not require a good credit rating, so to tie them (credit rating and employment options)together is just false and misleading.

    More employers are looking at credit history, but my experience is that it does not play into hiring all too frequently. I worked for an organization that used credit checks and criminal investigations and in 4 years we never refused employment on basis of credit history but several times as a result of criminal history.

    As a hiring Manager with some 100 people reporting to me…I could care less about their credit report! I wanted smart, creative, talented people working for me…not someone that could balance their checkbook. Would a poor credit rating hurt if you were a Financial Controller…maybe, but how it correlates to a Graphic Designer escapes me. Moreover, if you have 2 candidates of equal ability a better credit score is not the tie breaker!

    3. Credit cards do offer protection that cash does not afford. I do not understand how you need Identity Theft protection if you pay cash? Maybe people get ripped off a lot more than I do, but again, going out and getting a credit card to provide fraud protection seems a bit of overkill.

    Additionally, your renters or homeowners policy might provide some protection, and you can get a rider for CHEAP that will cover almost any event.

    Lastly, get a debit/check card from Visa and you are afforded ALL of the protection to help detect, prevent, and resolve fraud, etc. Check your TOS or call Visa! So, you can easily solve this issue AND PAY CASH!

    One more point on debit cards…besides not having a credit card for the past 10 years, for the past year I have spent traveling through Latin America while operating several online businesses. I DO EVERYTHING WITH DEBIT CARDS!!

    4. I am not only excluded from renting if I have a poor credit rating…but also if I have NO credit rating? If this is true then shame on us! But the same philosophy applies, go find another landlord because you CAN’T argue that EVERY landlord operates this way. I have not rented in the U.S. for more than 20 years so can’t speak from experience, a credit report means nothing in Latin America :) I will have an opportunity to see in October how Phoenix Arizona landlords approach this…I can tell you that I have NO doubt that I will be able to find a very nice 3bm for my family without a credit card.

    Samantha…learn to live without debt! While the MAJORITY will tell you it can’t be done, or if used wisely credit cards are a good thing, or some other silly argument – the majority are wrong! Listen to yourself and trust in yourself, I can assure you that a life without debt is an amazing journey.

  34. Brent says:

    Seems to be a lot of mis-information and dogma based on personal experience in these comments. Credit cards are not inherently evil and neither is credit. I got a credit card when I started my first full time job. I used it for everything and had it automatically paid off every month. It was (to me) an extension of my checking account. I’ve never paid any fee or interest on it for years now. Also because I used it for nearly everything when I applied for a mortgage my rating was excellent. Honestly I don’t even know what the rate on my card is, never have. Mostly cause I never paid interest. Credit is to take advantage of the fact that we need to live life now, but have all our lives to work. College is really hard to pay for with a student job. Homes are really hard to buy without a loan. Starting a business is near impossible without one. Cars probably should be paid for in cash, but I can see some reasons not to if the rate is low enough. Credit is necessary for some things Car rentals being the main thing I can think of. But a good credit rating is valuable and can be had without expense as long as traversed carefully.

  35. Michael says:

    I’m sick and tired of people demonizing credit cards when they really should be acknowledging the behavior that led them to their current sad financial state. If an individual gets into debt using a credit card, it’s because of their own bad choices. They CHOSE to spend outside of their means. Representatives from Bank of America, or JP Morgan Chase (or whichever bank carries their line of credit) were not standing there at the register with a gun to the borrower’s head. It’s just ignorant to assume that just because as a person, they do not have the self control to avoid spending outside their means, that I must have the same problem. If they’ve come to the realization that they cannot spend in a responsible manner, within their means, while using a credit card and have chosen not to use one, that’s great, but they shouldn’t project their inability to behave responsibly onto me.

  36. Sharon says:

    Yup, I just have no self-control. I wantonly go into debt to buy medications that keep myself and my husband functioning!

  37. Sandy E. says:

    @ Michael – I agree with you 100%. Credit cards should not be used for things you can’t afford and credit cards should not become substitutes for long term loans. If you can’t afford it, don’t buy it with a credit card. But many do? My conclusion is this: it’s almost funny because it’s so simple. It’s immaturity vs. being mature. You are mature, and good for you. I am too, but when I was younger? Not so much. I feel like I was immature because I did have a little bit of a problem w/credit cards, which finally became annoying enough to me that it caused me to grow up, exercise some self-control, and well – just be mature! Now? I pay off my credit card as though my life depended on it. I’ve become responsible for my own financial life. That’s maturity. Others that aren’t, in my opinion, are going through a period of immaturity.

  38. Michael says:

    @Sharon

    So you’re going to use the banks as a scapegoat again because your medication is unaffordable? Did Bank of America or JP Morgan Chase (or whichever banking institution carries your line of credit) make you sick? Did they force you pay for that medication on credit? I’m positive that the answer is no. If you got into debt because you used credit to pay medical expenses, that’s sad, but it certainly is not the fault of the bank that issued your credit card.

    You are responsible for looking for solutions to your problems because you cannot reasonably expect anyone else to do so. If your medication is too expensive, you are responsible for consulting your doctor to see if there are available generic alternatives. If your medication is still too expensive, you are responsible for looking into public programs available at federal, state, and local levels for providing you with assistance. Failing that, you are still responsible for seeking out avenues of assistance from care groups in your community, including local churches.

    Did you notice what word I kept repeating over and over? RESPONSIBLE! If you got into credit card debt because of a medical condition, you made the poor choice of using credit to pay for something that you could not afford. Should banks and lending institutions just forgo their profit (which is an obligation they have to their shareholders) because you made a bad decision?

    Just accept the fact that you made poor choices and quit trying to shift the blame to others.

  39. Sharon says:

    Oh, OK. I’ll just go slit my throat then. So stupid of me to get sick! And for my husband to do so, too. Thanks, Michael. I assume you[‘ll make the same decision when your time comes.

  40. kitty says:

    Sharon, I am sorry you are sick. Certainly medical expenses could run well higher than any emergency fund: I do have one friend who used 0% credit card offers to pay for cancer drug for her mother; I also know another friend who got in debt because of her husband’s out-of-pocket cancer-related costs.

    One thing I found out when someone I know was faced with $1000 every 3 weeks in co-insurance alone is that there are organizations out there who help with out-of-pocket costs for people with chronic diseases who cannot afford these costs. Look up healthwell foundation, for example, they did help someone I know. Their income/asset requirements include people with middle class income e.g. 50K or so – I don’t know the details but you can check it out. If your disease isn’t on the list, you may find other organizations like this – just google for your disease and help with out of pocket costs. There may be help out there for your situation, you just may not know about it. This is a bit off topic, but I figured that if you’ve never heard of it this information may be of use to you or someone else with a similar problem.

    Back to credit cards. Certainly there are people who got in debt because of medical bills. This is unfortunate. But the issue of this thread is why we need credit at all, and it seems to me that your situation is the exact explanation why. If you hadn’t have access to credit, how would you pay for it? As to the posts about self-control – obviously this doesn’t apply to people like you. But people who get into credit card debt because of medical issues aren’t the majority; otherwise, you’d have to assume over half of credit card users are sick which isn’t the case. Most of those in credit card debt got there because of overspending.

  41. Sharon says:

    Thanks,Kitty. We have too high income for any of the other help Michael so sanctimoniously holds me RESPONSIBLE for getting. I’ll check healthwell foundation, but my husband and I don’t have any of the classic diseases that you can get help for.

    I could divorce my husband and get on Medicaid instead of paying $400/month premium for a $2000-deductible policy. That would solve a lot of problems, but this strikes me as fraud.

    Thanks for the lead on healthwell! I really appreciate it.

    P.S. I would far, far rather stiff Chase and its 30% interest than my doctors and pharmacy!

  42. Sharon says:

    Sigh. Not eligible at healthwell. Thanks, anyhow.

  43. Scott says:

    Travel is so much more difficult without a credit card. Renting a car, buying airplane tickets, hotel reservations are all complicated without a card.

    And for international travel, you usually get a *better* exchange rate with a good credit card than you would with exchanging cash.

  44. Michael says:

    @Sharon

    You’re in a tough spot due to illness, I get it… I even feel a bit bad about it on your behalf. I’m not heartless, and I can even condone a certain amount of self pity.

    What I don’t get, and what I cannot condone is this attitude you seem to have that Chase bears any responsiblity for your predicament. You keep trying to shift the blame to Chase, but it’s not their fault. Yeah, you’re ill, and it sucks because it’s expensive, but it’s not Chase’s fault.

    Let’s review the facts:
    * Chase did not make you ill.
    * Chase did not set the price of your medications.
    * Chase did not make you accept the terms and conditions of use on the line of credit they extended to you (you accepted those terms voluntarily).
    * Chase did not make you pay for your medication using the line of credit (you chose to use the credit to make the purchase).

    So what did Chase do? They offered you a tool to help you manage your finances. Now, like any other tool, this one comes with usage guidelines (the terms and conditions of the line of credit). It can be dangerous if mishandled, but you were warned ahead of time about the consequences were of using this tool in certain ways. They laid out the rules in front of you when you got the card, and you agreed to play by those rules.

    I’m going to weave analogy here by way of a short story, so stick with me:
    I lend you a power saw to help you build a deck for your home. I warn you about the dangers of using power tools, especially that using them during thunderstorms is a bad idea. You thank me for my advice and go off to work on your deck. Later that afternoon, the sky clouds over, and you continue working despite the danger. The rain starts to fall, and you keep working. Suddenly, your home is stuck by lightning, and for some reason, the current travels down the cord of the power saw, electrocuting you.

    Is it my fault that you were electrocuted?

    Can we see the parallels? You’re building a deck (taking medication for an illness). I make available to you a tool to help you build the deck (credit cards can be used to pay for medicine). I warn you about the dangers of power tools and thunderstorms (Chase warns you, via the terms and conditions on the line of credit, that if you use that credit in a certain way, you’ll pay interest). You make the choice to ignore my advice and continue working in a thunderstorm (you continue to purchase the medicine even though you cannot afford it, using credit). You’re stuck by lightning, and are electrocuted (Chase expects you to live up to the terms and conditions that you agreed to, and pay the interest due on the account).

    You entered into a business arrangement (a contract) with Chase, and they’re expecting you to live up to your side of that arrangement. How would you like it if someone with whom you had entered into a contract with started complaining about the “burdens” placed on them by the contract, and were talking about breaking the terms of that contract? You probably wouldn’t be pleased. You’d probably consult a lawyer and consider suing that person for breach of contract. Why should it be any different when the shoe is on the other foot?

    *sighs*
    I’m going to stop now because explaining this is only making me more upset. Apologies to Trent for taking up so much space in the comments explaining something that should be common sense.

  45. Michael says:

    @Sharon

    Also…

    You claim to have an income that disqualifies you from receiving assistance, but conspicuously absent from your sob story is any explanation of what measures you’ve taken to reduce spending in your budget to try to accommodate increased spending for these medical expenses. I would wager you’re paying an exorbitant mortgage on a house that’s way more than you need, all the while driving your children to and from their private school events in new cars with outrageous monthly payments. Maybe it’s just that I’m a cynic, but I would count on winning that wager.

    I can’t say I have a lot of sympathy, you’re rude and insulting to fellow commenters on this thread, and it just seems to me that you’re looking for someone to listen to you cry “woe is me.”

  46. Anna says:

    I actually think a lot of you are wrong. I personally don’t have a credit card yet – and yes, Kevin #30, you can buy a book at Amazon.com with a debit card – and I don’t want one. I don’t demonize them because I’m in a ‘bad financial state’, I try to educate myself about them, hence me reading this article as a college freshmen. However, I truly don’t want one BECAUSE people get in such bad situations through credit cards. I don’t necessarily think they’re awful or a terrible idea, but I do think that it’s completely unfair that we are all required to get them to build credit. You can do anything you need to do with a debit card to my knowledge. From what I’m learning and trying to understand, credit cards are literally built to get you into debt. Compound interest, sky-high APR…it’s so easy to screw yourself over. Some people can’t see a job loss coming, or this economic recession that just hit. It isn’t fair to say that they’re ‘unsafe drivers’ or ‘won’t live as long’. Maybe I’m wrong, but I think it’s shady shady. I will be getting a credit card at the absolute lowest possible amount and I intend to spend a certain amount of money every month. I’d rather earn my money and use my debit card, thanks.

  47. First of all I would like to say excellent blog!
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