Author: Phil B
There’s an ongoing debate in our household about our daughter, K.B., getting a credit card. While the decision is ultimately hers, the discussion revealed that my husband and I have very different philosophies about young people and credit cards. Here is Phil’s perspective, stay tuned from my rebuttal next week:
Earlier this summer, our daughter turned 18 and is now legally allowed to get a credit card. We all sat down and talked about them and money in general, but ultimately the decision is hers to make. In that discussion, I came down on the ‘do not get a credit card’ side. Here then, are my reasons.
#1 There are Other, Better Ways to a Build Credit
The obvious, respectable answer to the question “why do you want a credit card?” is “so I can begin building a good credit history.” But the simple fact is that you don’t need a credit card to do that.
As we all know, your credit score is determined in part by how well you pay your debts. This doesn’t include things like your phone bill or rent, and so having a credit card and paying it off each month, or at least paying the minimum would be a good way to increase that part of the score.
However, if you’re going to college or university, and you’ll be getting a student loan to do that, then making your payments and paying off that loan will work just as well in increasing that part of the credit score.
A Better Alternative
As she is now 18, she is now able to take full advantage of Canada’s RRSP system. One possible alternative is to take out a loan from a bank and contributing it to your RRSP, the tax rebate you then receive is used to pay off the loan.
Tax programs like Intuit’s TurboTax have RRSP calculators in them that can determine how large a loan you would need in order to earn a rebate that would pay off that loan.
This is a great way to not only increase your RRSP, but also to build a solid credit history. Two birds, one stone. And banks actually like doing it.
#2 It’s not Needed for Online Purchases
Way back in the day, when I first got a credit card, there was only one way to buy things online. A credit card. If you wanted to buy something on Amazon, you were going to have to need a card. Some mail order places accepted money orders, and I actually bought 3 Star Wars Technical Journals with one of those, I still have them, they’re heirlooms now.
A Better Alternative
But today, a credit card is rarely the only way to buy something.
My bank card is a Visa Debit card, and can be used at many sites as if it was an actual credit card. The money comes straight out of my account.
PayPal also allows you to set up an account to act like this, and you can even pre-pay toward your balance.
Some sites allow for online banking and will allow you to login to your online bank account and authorize the money directly.
A lot of places, like Shopper’s Drug Mart, Walmart or even gas stations, have gift cards that you can buy that you can then use online. Failing that, you can even buy pre-paid credit cards and use those like a gift card.
In short, in the amount of time it takes a site to set up a Paypal account, online shops that are not doing this and only accept credit cards should actually be raising a lot of red flags with you.
#3 They Lead to Bad Spending Habits
Let’ face it, if you have no alternative but to save up for what you want before you can buy it, then you’re going to have great spending habits.
99% of people without credit cards probably have great spending and saving habits because they literally have no other choice.
If you want to buy a pack of gum and a pop, but you don’t have the money for it, then you realize that you probably didn’t really want minty flavoured pop.
But if you have a credit card, no matter how disciplined you are, sooner or later you are going to have minty flavoured abomination. Why? Because it’s “just $4”. But “Just $4”, every day for a month is $80 (assuming a 5 day working week). Of course, this leads to much bigger questions, like how are you eating that much gum in a day? Did a racoon die in your mouth? Take the rotting carcass bits out, and maybe you don’t need so much gum now.
Having a credit card is like standing atop a pole above a pit of spiky stakes. Discipline will keep you on top of that pole, and not using your card. But sooner or later, you’re falling into the pit of spiky death. The only way to avoid this fate is to not get up on top of the pole in the first place, i.e. not get a credit card.
It’s a lot easier to have good habits when there’s less chance to develop bad ones.
A Better Alternative
Keep your good spending habits and not get a credit card.
Now, I will admit that there is a case that I would agree with getting a credit card. Let’s say that you are moving into a new place and need to furnish it. I would suggest that you get a credit card to a specific store, like The Brick, or Ikea, and use that to buy what you need.
Because you are going to need a bed to sleep on, and you can’t spend 6 weeks sleeping on the floor while you save up for one.
The downside is that these store cards typically have a much higher interest rate than standard cards. But you also usually have the choice to not pay interest* for 6 months or so on large purchases, which allows you to put a serious dent in the principal before the interest kicks in. You might even pay it off in that time.
*Many of these cards, while not ‘charging interest’ will instead charge you a ‘balance protection fee’ which is a percentage based upon the amount owing. In other words, interest in all but name.
#4 Rewards Cards Are Not Worth It
These days, there are dozens if not hundreds of credit cards available that offer you rewards for using their card. Rewards like travel miles, cash back, points towards something, etc.
But they are also undeniably awful deals.
First of all, in order to get those benefits, you have to use the card. Usually a lot. This goes against the wisdom of only using a card for emergencies, or only for gas purchases. Sure, you hear stories about people who were able to profit from these cards, but those were only in the early days of the card before all the bugs were worked out. Now those loopholes are all sealed up, and you are left with your awful card that gets you 2 miles a month.
The interest rate on these cards is typically really high. This is the ‘trade off’ for giving you such a ‘great deal’ on the rewards. But as soon as you have a balance on that card, which if you want the rewards you’ll have to, there goes any profit you were making.
As for the cash back cards, there are usually a high number of hoops to jump through to get that cash. First of all, it’s not automatically given to you, but you have an ‘opportunity’ to claim it.
How generous of those billion dollar credit card companies and banks to give you $3 back for every hundred you spent, and right before you gave them another $80 for their annual fee! What princes among men!
A Better Alternative
Don’t apply for their shiny turd of a credit card.
#5 It’s a Terrible Emergency Plan
Ok, so maybe you’ll get a card for emergencies only. It’s a low interest card, with no annual fee or rewards, and you’ll keep it locked up in a fire safe in a block of ice in the freezer. If an emergency occurs, and what constitutes an ‘emergency’ will be clearly defined beforehand, then you will thaw the fire safe, and remove the card.
A credit card is only going to give you an emergency fund equal to the credit limit on the card. If you only have a $1,500 credit limit, then you are only able to have $1,500 emergencies.
A Better Alternative
Unlike a credit card, a savings account will give you the ability to have an emergency up to however much money you can put aside. Need room for a $5,000 emergency? Then have $5,000 in an account.
Even better, the savings emergency fund can earn you money in interest, growing your emergency fund. A credit card fund will only ever be what the bank allows you to have.
And given their nature, a credit card emergency fund is going to be a lot harder to regrow than a savings account one.
Photo Credit: Juliane Riedel/Free Images (CC 2.0)