Credit cards are out and cash is king, at least among millennials. According to a recent survey, 63% of young adults ages 18 to 29 don’t have any major credit cards at all. That figure reflects the more conservative attitude millennials seem to have when it comes to managing their money. While avoiding credit card debt is certainly good for your financial health, sidestepping credit cards altogether may have some unintended consequences that could hurt your wallet.
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It May Be Harder to Establish Credit History
Getting a credit card is by no means the only way to establish a credit history, but it’s certainly one of the easiest. For young adults who are fresh out of college, the only thing they may have on their credit report at this point is their student loans, which they probably haven’t started repaying yet. When it’s time to rent an apartment or get utility services in your name, a scant credit history can work against you, and you may find yourself having to fork over hefty deposits or end up getting denied altogether.
Your Credit Score May Suffer
One of the most common misconceptions about credit is that your credit score and credit report are basically the same thing. In reality, your credit score is a three-digit number that’s determined by the information in your credit report. There are lots of different scoring models out there, but the FICO method is the most common. Your FICO score is based on your payment history, the amount of debt you owe, the types of debt you have, inquiries for new credit and the age of your accounts.
Payment history accounts for the biggest chunk of your FICO score, so if you’ve got a credit card you’re using on a regular basis, it’ll show up on your report. As long as you’re paying consistently and keeping your balance low, you should see your credit score climb little by little. It’s a double-edged sword, however, since even one late payment could knock as much as 100 points off your score.
Increased Difficulty Qualifying for Loans
Not having credit cards creates a sort of domino effect, since it’s harder to improve your credit score when you don’t have any credit history. When that’s the case, it puts you in a more difficult position if you’re trying to qualify for new loans or lines of credit. While millennials in particular are putting off major purchases (like a home) for longer, when they do finally get ready to buy they may run in to trouble because of their credit score. A lower score typically means a higher interest rate, if you’re able to get approved for a loan at all.
You May Come up Short in an Emergency
When you’re just starting out in your career and not making much money, it can be challenging to grow a stash of cash in case of emergencies. Add in the nearly $30,000 average student loan debt that many millennials are dealing with and saving anything seems almost impossible. Having a credit card on hand to cover an unexpected expense like a car repair or medical bill can provide you with a safety net until you’re able to build up your reserves.
The Bottom Line
If you’ve already built up a healthy emergency fund, your credit score is near-perfect and you don’t expect to borrow money any time soon, then ditching credit cards altogether may not have too much of an impact. On the other hand, if your financial picture is a little less complete, you might want to consider what the true costs are before you swear off plastic permanently.
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