The credit score company FICO released new research that showed the number of people aged 18 to 29 without any credit cards doubled from 8% to 16% from 2010 to 2015.
The mainstream media has been quick to pat these young citizens on the back for making wise decisions and to justify the lack of credit card use. (Most say that these young adults saw their parents get clobbered in the recession and are fearful of credit cards.) The CARD Act of 2010 also makes it impossible for anyone under 21 to get a credit card without a cosigner, so that could also attribute to some of the drop in use.
This increase in individuals without a credit card also dropped the average amount of credit card debt per person by about $1,000 from $3,073 to $2,087. That makes sense; if a significantly higher number of people don’t have credit cards at all then you are spreading the total credit card debt over a larger population.
Yet I think the applause for being credit card-less is a bit shortsighted.
Don’t get me wrong – I think a majority of young Americans can’t handle the responsibility of using a credit card. So going without one is a better choice than to get access to a financial tool that you can’t handle. That road ends in serious debt that will take months or years to dig out of. If that is the only option: going into terrible debt or not using credit at all, then have it with going credit card free.
But are those the only two options?
The Importance of Building Credit History
What if there was a mysterious third option called “responsible credit card use” that you could choose? Wouldn’t that be the best choice to make instead of abstaining from credit cards completely?
Let’s not even bring credit card rewards into the equation. Responsibly using credit cards leads to significantly better financial options in your future. Here are three ways using a credit card responsibly in your younger years will do for you:
Credit History Builds Credit Score
As a 21 year old you won’t be able to walk into a bank and borrow hundreds of thousands of dollars to buy a house with a blank credit history. If you don’t use credit cards your options to build a strong credit history are limited especially at a young age. You could get a car loan, but you won’t get the best rates. After that the number of options goes down because you don’t have enough income to justify securing a large debt especially since you haven’t proven yourself with smaller debts in the first place.
On the other hand if you use a credit card wisely — that means using it like a debit card, paying off the bill immediately, and never paying a dime in interest or fees — you are only benefiting yourself. It can be hard to get your first credit card, but after 12 to 18 months of responsible use, no late payments, no missed payments, and generally staying out of financial trouble you can expect to start receiving more offers.
Add in responsible unsecured credit use to a credit history and your credit score will start to go up. And we all want high credit scores.
Credit Score Leads to Lower Borrowing Costs
Why do you want a great credit score? The simple fact is unless you inherit a trust fund with millions of dollars in it you are going to have to borrow money at some point in your life. Few people can afford to (or wait the decades necessary to) buy a home with cash.
That one major purchase underlines the cost of a poor credit score. The difference in borrowing costs for a great credit score versus a poor one might be 1%. That seems like so little up front, but over the decades it takes to pay off a house in the six figures that 1% will turn into tens of thousands of dollars.
Likewise if you decide to buy a new vehicle and are enticed by the 0% APR offer the dealership has you won’t qualify with a poor score. Only the best borrowers get access to those rates.
All because of your credit score. And your credit score is based on your credit history.
Lower Borrowing Costs Leads to Greater Net Income
Continuing the natural progression: lower borrowing costs means greater net income for you.
Would you rather spend $150,000 in interest payments to buy a home or just $125,000? Would you like to get the 0% APR offer on the new car or the 6% offer that you qualified for?
The lower your interest rates and overall borrowing costs for all types of financial products the higher your net income will be. This might be a simple explanation, but it is just math. The fewer of your dollars that leave your bank account in the form of interest payments to someone else, the more money you will have to save for your financial future.
That means more dollars for emergency funds, weddings, and retirement.
Irresponsible Credit Card Use is Foolish
All of the above does not apply if you cannot handle using a credit card responsibly. The credit card industry literally cashes in because so many individuals cannot handle that sly piece of plastic in their wallets. If you think a credit line is a good reason to go buy a lot of things you don’t need and pay them off over the next 6 years, just stop. You are literally throwing money away.
I think of credit cards as tools. Just like a shovel can be used for good things like digging holes in your garden or for terrible things like digging holes to hide that spare body you have laying around, a credit card is the same way.
It’s a piece of plastic just like your debit card. The only difference is instead of the money immediately leaving your account you get to hold on to it until the end of the billing period. This normally positive thing — you could earn interest on that money you’re holding — often leads people to spending money they don’t have instead. If you track where you’ve swiped your debit card and subtract those dollars from your budget like you would with a debit card you will be just fine.
And the long term benefits of using that credit line responsibly could save you hundreds of thousands of dollars in the future. Isn’t that worth it?