Credit cards are seen as an essential method of payment for the majority of Americans. Unfortunately, credit cards are not for everybody. There are two groups of people who do not possess a credit card, but probably should some day. The big question is: When do you know when you are ready for a credit card? Let’s take a look.
Credit Cards and Young Adults
As teenagers mature into young adults, managing their finances responsibly is a major achievement. Ideally, the process of understanding money and credit cards should begin at a very young age. Children should be explained how money and credit cards work, and should learn by example as they observe their parents making transactions at retailers and paying their bills at home.
I was given a credit card on my parent’s account when I was in my early teens. I had strict instructions to only use it when I obtained my parent’s permission in advance, or in an emergency. Later, I was given permission to use the card to purchase things for myself on the condition that I was able to pay my parents back out of my current savings. In that way, I was taught that credit cards are a method of payment, not a method of finance.
After I went to college at the age of 18, I eventually acquired my own student credit card. My parents reminded me regularly that I was to pay the balance in full and on time. Their persistence eventually became quite annoying, but clearly they were trying to make sure I did not develop the habit of treating a credit card as a license to spend money I did not have.
I think my experience illustrates the ideal situation, as my parents and I were probably a little bit more financially responsible than our peers. The problem is that each person is different.
Some teenagers are intent on pushing the boundaries that their parents set. Parents can get upset and even punish their adult children when they screw up. Later, after they have learned from their mistakes, all is forgiven.
Unfortunately, the bank will not forgive your debts, and a person’s credit card rating can suffer for years. Worse, the implications of having a bad credit rating will not become apparent to a college student until they apply for a job, a home loan, insurance or a car loan after they graduate. A responsible parent should take every necessary precaution to ensure that their children leave college and enter adulthood with their credit rating intact and their debt minimized.
If I were advising the parent of a young adult as to whether they should have a credit card, here are the questions I would ask:
Does he or she have a track record of paying their bills on time, such as cell phone, internet service, and utility bills?
Does your child ever lose track of their spending on special occasions, such as travel, holidays or evenings out with friends?
Has your child demonstrated that he or she has internalized the relationship between earning and spending money, i.e., will he or she get a job and work more hours to save for specific expenditures?
Ask yourself and your child these questions, and the answers will indicate whether it is time to have their own credit card. If the answer is “not yet,” consider a debit card, a prepaid credit card or a card on the parent’s account as a learning tool towards the eventual goal of responsible credit card use.
Adults Rebuilding Their Credit
The other group of people who do not have credit cards are adults rebuilding their credit. Usually, these people are emerging from bankruptcy, but a fortunate few have merely given up credit cards before bankruptcy became necessary.
For these people, the criteria they should use in their decision are the same as that for a young adult. The difference is that adults rebuilding their credit must rely on their own evaluation of themselves rather than their parents’.
If you have been able to function without a credit card for some time, there are few reasons to get a new credit card soon after you are likely to be approved. An important reason to have a credit card are the need to spend large amounts of money without having to carry cash. A debit card fills this need and helps people to learn how to only spend money that they have already earned.
One of the critical roles of a credit card is to purchase travel services. Hotel reservations and car rentals are extremely difficult with a debit card, as they will take a substantial deposit that will freeze funds in your bank account until well after the trip concludes. Even the purchase of airline or cruise tickets with cash or a debit card is risky, as you have no recourse in the event that the company fails to deliver the promised travel for any reason including bankruptcy.
Finally, credit cards can be a useful tool in rebuilding your credit as you work towards the eventual goal of a home loan.
Evaluate your need for a credit card against your recent track record of consistently spending within your budget and paying your bills in full and on time.