For decades, Americans have used credit cards to fund their purchases today, while paying for them later. However, the millennial generation is changing those rules.
In fact, millennials prefer to use cash, checks and debit cards over credit cards when spending, according to TD Bank's Consumer Spending Index, a survey which polled more than 1,500 consumers ages 18 to 70 with a household income of at least $50,000.
The Index found that each year, the average American spends $4,700 with a credit card, and $2,400 with cash, a debit card and checks for discretionary purchases. By contrast, millennials spend $5,200 using cash, a debit card and checks, but charge just $3,300 to a credit card. That's 22 percent less than the average consumer. Additionally, millennials use cash, debit cards and checks for 50 percent of their overall monthly spending — and only use credit for just 33 percent of purchases.
Keeping plastic tucked firmly inside a wallet sounds like a great strategy for anyone trying to avoid debt. But, many credit cards offer big benefits you don't want to miss out on.
"The primary misconception consumers have about credit and financing is that it leads to overspending and debt," said Julie Pukas, head of U.S. bankcard and merchant solutions at TD Bank. "It's true that credit usage can lead to those things, but when used responsibly, credit cards are a financial tool that allow consumers to make purchases with safety and security, while earning cash back or other rewards."
Click through to find out what can happen when you don't use credit cards.
1. You Miss Out on Free Money
By paying with cash, buyers miss out on cash back and other lucrative rewards.
For example, depending on how much you spend, you might accumulate $150 in cash back over the course of the year if you get a rewards card that gives you 2 percent cash back on dining and 1 percent cash back on all other purchases.
For some consumers, that $150 can add up to a month of free gas or several months of free coffee. Choosing cash over credit means "consumers are leaving that money on the table," Pukas said.
2. You Have a Tough Time Building Credit
Without a credit card, you will have a tougher time building credit. By opening an introductory credit card account, making on-time payments and keeping balances low, young consumers lay down a foundation for a strong credit history.
"Strategic and savvy credit usage allows consumers to build a strong credit score," Pukas said. "This credit profile allows for significant savings on interest in financing larger purchases, like a home or a car."
3. You Struggle to Get a Mortgage
Mortgage lenders look at a variety of factors when making decisions about loans, but they put a premium on credit history. Consumers with good credit qualify for far more attractive loan terms, according to the Consumer Financial Protection Bureau.
MyFICO has a loan savings calculator that makes the benefit of a good credit score crystal clear. Input changes to a hypothetical credit score into the calculator — while keeping all other variables the same — and you will see how a lower credit score can cost you tens of thousands of dollars over the life of the loan.
4. You Get Lousy Terms on a Car Loan
Like mortgage brokers, auto lenders factor credit heavily when making decisions about car loans. Few Americans have enough money on hand to buy cars with cash, so most end up financing their purchase.
Good credit — which can be built and maintained through the responsible use of credit cards — can help you get much better auto loan terms.
5. You Don’t Have Comprehensive Fraud Protection
In the age of identity theft, all consumers are at risk of being victimized by someone who might steal their card or card number, hack into their account or otherwise spend their money fraudulently.
It is much easier to flag and reverse charges on your credit card than it is to recover money withdrawn from a bank account through the dishonest use of your debit card.
"If someone uses your debit card fraudulently, they are spending your money that is in your account," said Matthew Coan, who owns the financial comparison website Casavvy. "When someone uses your credit card for fraudulent spending, they are spending the credit card company's money."
6. You’re Strapped for Cash
If you use a debit card instead of a credit card, it might cause some unexpected issues. For example, hotels and rental car companies often temporarily put a monetary hold on debit cards if you use them to check in, which reduces how much money you have in your bank account.
Once the businesses are paid in full, they reimburse your money. However, reimbursement can take time, leaving you strapped for cash or possibly facing overdrafts if the money was held on a debit card attached to your bank account.
7. No One Has Your Back in Merchant Disputes
Have you ever purchased an item, only to find that its quality was a bit less than advertised? If you pay with cash, you might be out of luck in terms of getting a refund. At the very least, you might have to go through a lot of hassle to get your money back.
However, if you buy the item with a credit card, the issuer typically will step in on your behalf. "The added weight of the card issuer supporting the individual can move the merchant to fix the situation," said Scott Vance, owner of Trisuli Financial Advising in Cary, N.C.
8. You Reduce Emergency Fund Options
Survey after survey shows that most Americans have very little money saved for an emergency. That means they would have a hard time dealing with unexpected medical or dental issues, car repairs or a job loss. Most experts recommend saving and stashing away a bare minimum of at least three months' worth of expenses.
Emergency funds should not consist solely of credit cards. However, a credit card can supplement and support an insufficient rainy-day fund. The more you use a credit card responsibly, the more likely it is that you will be approved for higher credit lines, which can add extra cushion to an emergency fund.
9. You Hurt Employment Prospects
Many companies pull applicants' credit reports as part of employee background checks. Although the practice is controversial, a bad credit history — or lack of credit history — can lower your chances of getting a job for which you otherwise are qualified.
"Using credit cards in a thoughtful and predictable way shows lenders and future employers that you understand cash flow and know how to manage your financial affairs," said Rebecca Schreiber, certified financial planner and co-founder of Pure Financial Education in Washington, D.C. "Future employers may request your credit score to indicate how responsible you are in general, and a low credit score from little credit usage will hurt you down the road."
10. You Pay More to Travel
Get a travel rewards credit card, and you can reap benefits that you would not get when paying with cash. According to Forbes, there are two types of credit cards that can help travelers save real money:
- Generic cards. These offer points or miles that can be used toward any travel-related expense.
- Brand-specific cards. Airlines and hotels offer these cards for travelers who stick with a specific chain or airline.
Lucrative sign-up bonuses are another benefit for travelers. These bonuses might include bonus miles, a free airline ticket, a free night in a hotel or cash back.