According to a Bankrate survey, 63% of millennials do not have a credit card, opting for debit cards or cash instead. This compares to 35% of adults over age 30.
What’s the deal? The survey didn’t provide follow-up questions for context, but here are some guesses…
For starters, the “millennial” generation starts at age 18. I didn’t get my first credit card until I graduated from college and got my first job. I never really had the need prior. That was true for most of my friends as well. So I think a big part of it is lack of perceived need.
Second, there has been a very vocal anti-credit card meme within the media and from many supposed financial gurus (some of whom peddle their own brand of debit cards, ironically). As a result, credit cards have a negative stigma attached to them, and many millennials have probably been scared away.
And finally, debit cards are (for better or for worse) auto-pay by default. There is an attractive simplicity in that (note: you can set up credit cards to do the same).
While this anti-credit card phenomenon, on the surface, might appear to be a good thing – appearances can be deceiving. Those who do not have debt problems and will responsibly pay their balance in full every month are actually tangibly better off using credit cards versus debit cards for the following reasons:
1. You NEED to Build a Strong Credit History
Responsibly using credit cards is one of the easiest and most reliable ways to build a strong credit history. Why is this important? Our credit scores determine if we are credit-worthy, and if so, the interest rates we should be offered given our risk profile. Without a credit history (each credit card is a line of credit that influences your credit score), it can be extremely difficult to secure loans and nearly impossible to secure the best rates.
And getting additional credit approved can improve your credit utilization ratio, which has a significant impact on your credit score.
When it comes to large loans, such as a mortgage, this can have a profound monetary impact. For example, a simple 0.5% rate increase from 4% to 4.5% on a $300,000 30-year mortgage would result in $31,680 in added interest charges!
Outside of loans, our credit scores and credit history have already been pulled in to other areas of our lives, unfortunately. Insurance companies have long used credit as a variable in determining your premium rates (offering discounts for excellent credit, for example) and 47% of employers perform a credit check in the job hiring process. The information (or lack of it) in your credit check could actually cost you the job. Pretty scary.
2. Credit Cards Usually Offer More Consumer Protection than Debit Cards or Cash
While on an international trip a few years ago, I had a debit card that was stolen from me and then used to make $400 in withdrawals from my bank account. Because it was an ATM withdrawal, I had to go through my bank for reimbursement. They did not make it easy on me and did not refund the full amount, leaving me at a loss of $50.
Had I simply used a credit card instead, I am confident that the amount would have been credited as an unauthorized transaction. Over the years, and with more than a handful of unauthorized transactions, I’ve never had a credit card company NOT credit me in full.
Under federal law, your personal liability for fraudulent charges on a credit card can’t exceed $50. But if someone fraudulently uses your debit card, you could be liable for $500 or more, depending on how quickly you report it. And while the investigation is under way, you could be out the needed funds in your account. It’s a lot less stressful to have someone else’s money (credit provider) be stolen versus your own (bank account).
Then there’s cash. If someone steals a $100 bill out of your pocket or you lose it somehow, good luck getting anyone to give you $100 back.
3. Credit Cards Pay you Back
If you use a debit card to pay for essentials, such as groceries, gas, utilities, etc., then why not get cash back for it?
I get 6% cash back on groceries, 5% cash back on restaurants and gasoline, and a minimum of 1% cash back on everything else, with a variety of credit cards. This cashback – which would be ZERO with a debit card – is over $500 a year (tax-free). That’s like getting a few days of work pay for doing no work at all! Just about any/every credit card purchase will get you a minimum of 1% cash back these days.
One of the few banks that offered a cash back debit card – PerkStreet Financial – went out of business. I’m not aware of any major banks that offer cash back on their debit cards these days.
The Big Credit Vs. Debit Card Caveat
In case you missed it earlier (I bolded it for you, so no excuse!), there is a big caveat to all of these arguments – you should only apply for and use credit cards if you do not have debt problems, only use cards to pay for the essentials, have good cash flow to pay your balances, and then responsibly pay your balance in full every month.
I haven’t had a credit card balance carry over from one month to another or paid a late fee in the decade-plus I’ve been using credit cards. I realize that not everyone will be able to do have the same kind of track record, but if you can, then the benefits of credit card use definitely outweigh the negatives.
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Interesting. I guess if you are completely disciplined with money using a credit card makes sense. With all the worries of being in debt some may consider debit cards to be a better alternative. I guess it depends on the person.
I’m all for credit cards because of credit card rewards. I actually still regret not using a rewards card from the ages of 18 to 21 because of the amount of rewards I missed out on..
I only use my debit card when I need to run to my bank’s ATM to withdraw some cash.
Credit cards all the way. If you’re able to pay your balances off each month pretty easily then there is no reason not to get a rewards credit card. Even if it’s just for groceries, the AMEX BC Preferred will get you 6% cash back just for buying your regular groceries. That’s easy money right there. I can’t remember the last time I used a debit card. Just seems so risky.
I am a Millennial and I was definitely scared of credit cards when I applied for my first one out of college (and that was pre-2008). I guess I’m in-between on this because I did sign up for one for the benefit of building my credit history, but not to use on an everyday basis. I used it very sparingly for about three years until I decided I could trust myself with putting all my purchases on it and going for the rewards and such.
Do you think that responsible credit card usage makes a worthwhile positive impact on credit scores for someone who already has a credit history due to student loans, as many Millennials do?
Well said. Credit cards are a much better option, but only if you have a hold on your finances. If you can’t pay off your credit card every month then you should stick to your debit card until you’re able to control your expenses.
You can be disciplined with a credit card if you really want to be–you have control of what your credit limit is, so if you’re afraid of having $5,000 to spend, call the credit card company and drop the limit.
I always get frustrated when my friends hate on credit cards. People in their twenties are so quick to brush them off and lose out on the credit benefits. I bought an xbox one two weeks ago just with my cash back rewards from the past year. Guilt-free upgrade and establishing credit history? I’ll take it
“For example, a simple 0.5% rate increase from 4% to 4.5% on a $300,000 30-year mortgage would result in $3,162 in added interest charges.”
Calculations correct? Seems lower than should be.
Ya, It should be $31,611. That is strictly comparing the ammortization schedule of a 300k loan with 4% and 4.5% and taking the difference in monthly payments and multiplying it by 12, and then 30.
bankrate calculator shows it is $31,611.10 more over 30 year period.
based on payments ($1520.06-$1432.25) $87.81 x 360 months.
I think he just left off a number by accident. =)
I did. Modified. That’s a big difference!
Credit cards require discipline and organisation. The penalities just once can soon wipe out any savings made due to insanely high APR’s and fees.
I’d like to see a middle ground approach where debit cards offer incentives…a new age of banking will be here soon enough. Once true international banks arrive in the US we’ll be opened up to some of the awesome products available elsewhere. I continue to be amazed at how ‘dark ages’ the system is.
A very key point regarding those exorbitant late payment penalties.
I have 4 different credit cards that provide cash back, points or miles.
I pay off each card’s balance every month to avoid interest.
As a safety net I have BillPay account programmed to send the minimum required payment for each card every month in the event I forget to pay the total balance in time (which is almost never).
In the rare event that I update the auto payment by the cut-off date, they receive, at least, the minimum payment to avoid the penalty and I just pay interest on the balance.
I typically agree with you here, G.E. However, I really don’t agree at all with this advice. Sure, credit cards do offer 1-3% returns on what you spend, but they cause people to…
1) spend more than they think they are spending
2) not know what they are spending
3) lose the pain of spending
I agree with the necessity to build credit, but you can pretty easily do that with a credit card that you ONLY spend on gas. Just pay it off each month and you’ll build faster credit than if you would use it for 100% of your expenses.
Credit cards are one of the biggest lies fed to our consumer-driven society. If you want to control your spending, use cash for everything. If you need to build credit, get a card that you only use for gas. Pay off your $100-200 balance every month.
All three of your points are only valid if you assume that having a card that says ‘credit’ on it versus ‘debit’ causes people to lose their minds and spend frivolously. That may be true for some people, but I don’t see any difference for people with half a brain. Or at least that is how I view it and am recommending that others do here.
I totally agree with you! People need to realize that this is a different ballgame from even just a decade ago. For one thing, those pre-approved credit cards aren’t floating around like they used to be. It’s a lot harder to start establishing your credit now than it was five to ten years ago. Like everyone is saying, if you’re responsible enough to manage your finances and self-disciplined to set your own limits, why not reap the benefits of all the different rewards (on top of building your credit history)?
I respectfully disagree with you, G.E. I actually went back and forth on this for a while and finally decided against credit cards. There are a few reasons:
1) The idea of being in debt is something I want to stay far, far away from. Even if it is just a few hundred dollars per month which I then pay off, it’s still being in debt. I like the idea of not needing a single cent of anyone else’s money.
2) The advantages of cashback and credit building are outweighed, in my opinion, by the discipline you have when using cash. I believe that swiping a card will cause people to spend more on things they don’t need. Using a cash system like Dave Ramsey suggests ensures that you are controlled every month, where every dollar has a name, and you are not overspending even a dollar. This is much harder to control even for the most disciplined when using credit cards.
3) No one ever got rich by getting cashback bonuses. I’m obviously a big fan of Dave Ramsey, and listening to his radio show proves this. When people call in and say they’re debt free and are on their way to huge wealth, they don’t credit cashback bonuses. They credit discipline, good planning, and teamwork (assuming they’re married). I understand the draw for the cashback bonuses, as it seems like free money, but with my frugal lifestyle, 5% cashback is not that much money.
4) If someone refuses to rent out an apartment or give me a job because I have no credit history, it’s probably not a place where I want to live or work. Because that’s just backwards. There are lenders who will give you a mortgage even if you have no credit history, assuming you have a good sized down payment and a great financial background. I don’t want to be able to buy a house without paying a down payment of a good chunk of it.
This, of course, is just my opinion. I did go back and forth with it for a while before cutting up my credit card and canceling out the account. I must say that I do feel better now by not having a single penny in debt nor the means to go into debt just by swiping a card!
I knew the Ramsey fans would come out of the woodwork. Here’s the deal – Ramsey’s message is built for the masses, who are typically bad at managing their finances. My message is not – and I clarified that by saying you must pay your balance in full every month.
Of course, nobody is going to get rich w/ cash back bonuses, but if you can get them, why not? $700 a year just for swiping a card that says ‘credit’ vs ‘debit’ on it? I’ll take it!
Would you never take out a student loan or mortgage? 1-month of revolving debt that you pay no interest on seems relatively insignificant.
I agree with you. If everyone who uses this approach is 100% disciplined and spends exactly what they would if it was debit/cash, then it has an advantage. The problem is that most people will be overconfident with their ability to be disciplined, and they will end up spending more than they otherwise would have and possibly use the credit card as a crutch if times get tough. I used to do the credit card thing (paying it off every month) but decided 6 months ago to stop, since I really like the feeling of not having a single credit card nor single dollar of debt.
As far as the student loans and the mortgage. I came out of college with $15,000 in debt. If I could do it again, I would’ve picked a more affordable school and I would’ve worked more to avoid student loans altogether. For the mortgage, I hope to pay for my first house with cash, a modest home for which I won’t need to take out a mortgage. Good planning persistence can pay off!
Why pay for a house in cash? Losing out on liquidity, investment earnings, the tax advantage on mortgage interest.
Brad,
The way I look at it, if you can’t pay cash for it, you can’t afford it. It takes planning and discipline to pay for things in cash, especially a house. Paying in cash forces you to buy something more affordable and to not become leveraged on a house way too expensive for you. Plus, debt is something I want to stay far from.
I don’t believe in the tax advantage argument. To my understanding, you’d pay, for example, 4% in interest and get maybe 25% of that back. Means you’re still paying 3% in interest. That’s still more than 0!
Buying a house for the tax deductions on the mortgage interest is like spending a dollar to save 25 cents.
And not everyone qualifies for the deduction, i.e. we bought our house for $219,900 at 3.75% fixed and never had enough interest in a year to itemize it so we always took the standard deduction anyway.
There would have to be some psychological impact because from a purely financial perspective, this isn’t the optimal financial move. Passing up a highly collateralized loan, with an artificially low rate thanks to the feds, improved further by mortgage interest and property tax deductions, because “debt is bad” is silly.
There’s greater security in liquidity. When disaster strikes you’ll enjoy not having $200k fully holed up in equity. And any future mortgage against the house is sure to have a much higher rate. Take the low rate now, invest your cash in a stable portfolio, and enjoy not eating ramen and paying a landlord for X years while you save for a house. And hey, you’ll likely come out ahead.
Proper planning allows you to have your cake and eat it too.
There is no reason to have debt when you have a credit card. With online banking you can transfer the payment on the same day as you make the purchase. Or you can set up for auto pay and have a specific account used for payments where you transfer the money with each purchase.
The rebates are an indication that the system is broken. The rebate money has to come from somewhere and that somewhere is our pockets. American express is not going bankrupt from rebates (actually kickbacks is probably a more descriptive word). But this is the world we are in and these rebates exist so we might as well take advantage of them.
From a legal standpoint, there are simply more protections for owners of credit cards than of debit cards. From a practical standpoint, if someone steals your credit card you fix the problem before you send money to pay the fixed balance. With a debit card they have your money first and you have to work at getting your money back.
Thanks for providing your insight, G.E – really interesting stuff. I do have a question for you though.
I’m in my early 30’s and completely debt-free. I got rid of my credit card last year because I discovered that I was putting a lot of “unnecessary” stuff on it (i.e. shopping, dining out, etc.). I paid it off every month, but honestly, it was just too tempting for me. Since I got rid of my credit card, I developed monthly budgets and do my very best to stick to them (and usually do).
I’m currently renting but would like to buy something next year. I’m working towards a down payment of 10-20%. I’ve been told that I *should not* have a problem getting a reasonable mortgage because I have a decent salary, excellent rental, utility, and credit history. Plus, I’ve also been told that manual underwriting is something they can pursue if necessary.
Question: Will not having a credit card really hurt my chances of getting a mortgage?
It depends on what your credit score/history shows. You can check that out for free at Credit Karma: https://20somethingfinance.com/credit-karma-review/
I have a few issues with this post. I understand the whole credit card benefits situation, but 99.99% of consumers do not ever win over the credit card companies, so encouraging consumers to attempt to beat the credit card companies at their own game is highly irresponsible.
But besides that, no one realizes that when consumers purchase items with their rewards cards the merchant is actually charged at a higher rate to sell their items to you and that just ends up forcing businesses to increase their selling prices to compensate for the fact that consumers are getting rewards, which means you’re not actually getting anything more with your rewards. In fact you’re just driving costs up and hurting people who do not use rewards cards because the merchant increases prices to coincide with their overhead expenses.
This idea that, well others are doing it, is like saying others collect welfare so I should also collect welfare. There’s no such thing as a free lunch. Someone is paying for your rewards, maybe today it’s not you, but chances are in your lifetime it will be you, paying for your own rewards whether directly or indirectly. Pay with your own earned money not borrowed money and encourage others to do the same.
“99.99% of consumers” – link to that research? I know that I’m not in the 0.01%.
To your merchant point – I am willing to bet that most debit card users run their transactions as credit, which has the same associated costs. And once you get beyond millennials, over half of the population is using credit cards. They aren’t going anywhere. They’ve made commerce much easier, which benefits everyone.
They aren’t going anywhere unless Apple Pay makes them obsolete… :)
I had a similar experience with credit cards to you G.E. I didn’t touch them until recently because I knew myself and my lack of self-discipline. I was able to get a good mortgage rate only because of my wife’s great credit that she had built up over the years by paying off her credit card each month. My credit score did not exist since I had no credit history, which is better than a bad history!
Due to marriage and time, I have become a bit more responsible and decided to get the AMEX 6% cash back on groceries card you recommended. It has been great seeing my credit slowly grow.
If finances ever got tight and I started to get tempted to use my credit card unwisely, I’d feel no shame in pulling a Dave Ramsey and cutting up the card. Hopefully I won’t regress that far :)
“…consumers do not ever win over the credit card companies” assumes that using a credit card is a zero sum game between you and the credit card company and one of you screws over the other. Granted, the credit card company would prefer that you incur some debt so they can charge interest, but they make a lot of money on, as you said, merchant fees. If you use your credit card and pay it all off, the credit card company still gets the merchant fees, and you’re both happy.
As to your point that using credit cards are unethical because they raise prices, I don’t know of a single debit card that isn’t Visa/Mastercard, etc. Thus, your only alternative is to pay for everything in cash, which is impractical for most people.
Besides, why exactly is it unethical? If you buy a product and return it, you caused a store more in expense without giving it money. Same if you test drive a new car without buying it or shop around for insurance. Heck, even visiting a website with banner ads paid for by impression (like this one!) costs the company sponsoring that banner money; if you don’t buy that product, are you being unethical? Practically everything you do costs someone else money even if you don’t realize it, and as long as you aren’t intentionally doing something malicious, I think it’s a huge stretch for you to say it’s wrong to do.
These are all good arguments for why you should have a credit card. I’m glad you also highlighted that you should not have a CC if you have debt problems or can’t/won’t pay the balance in full each month. This is exactly why I’m going to limit the number of CCs I have open as I pay off debt.
We run a small business on the side and charge the customer an extra 2.5% to use the credit card vs. debit, if the debit is run in credit mode it’s still a credit card. For one, we’re on the hook in the case of stolen identity, and most importantly the credit company gets an off-the-top share (American express is the worst). Some gas stations have started giving discounts to debit buyers, effectively negating the rewards in that department. I no longer carry a credit card out altogether, and honestly believe the lack of temptation to spend in order to get the $700 reward outweighs the $700 reward. I’m a millennial.
Your practice is likely against your merchant agreements with the credit card companies. I would have no qualms with reporting your violations to them, and would never return to your business, or even make a purchase, for your surcharge. This is exactly why has stations offer a DISCOUNT to cash payers, because everyone is charged the same price up front.
We would not complain about you never returning. Is a discount for cash mathematically different than a surcharge for credit?
I have a Fidelity Amex that offers 2% back on everything, right into my investment account. This year I’ll be getting around $1,000 back. Why? I pay rent with it. On behalf of myself and my roomies. They are millenials (like me) that hate credit cards. Their loss is my gain.
Amex is also amazing with customer service… my card was stolen last year. I’d eaten lunch at work and a purchase was made an hour later several states away. They called me to inform me, told me to cut up the card, and my new one came quickly. The charges were reversed with no fuss.
On the other hand, US Bank has disgusting overdraft fees and has been known to re-order your transactions to get more fees out of you.
I also spent $79 for a Southwest credit card (50,000 free miles). It has a much higher limit and I keep it for emergencies. I’ve been building credit since age 18.
Wow, so you paid $50,000 in rent this past year? 2% of $50,000 is $1,000 cash back. Glad I’m not paying that much for my yearly rent! Haha.
The 2009 CARD Act likely impacts the survey statistics. It requires a consigner for anyone under 21 and has stricter guidelines for advertising to students, and qualifying for a credit card. It wouldn’t surprise me one bit if the majority of adults with credit cards told tier children no to cosigning on one. I would try to make them an authorized user on one of my cards before I would consider consigning.
The objection to card use is the myth that one spends 10-15% more on cards than they would if using cash. ‘Myth’ because those studies all use a contrived scenario where the choice is $20 cash vs $20 gift card or a similar experiment. This doesn’t scale to a $5000/mo budget.
The real issue is one of “pay in full” vs the “balance carriers.” I have no doubt the balance carriers have already established they should not use their cards, and have proven themselves to spend more than they should.
I adhere to a budget, save first, and not paid a cent interest in 30 years. When my daughter was born, I got a card that kicks back 2% into a 529 account. With no other deposits, that account is now over $28,000. And she’s a high school sophomore. This may very well cover a full year’s tuition. Half of this country’s families don’t have even $10,000 saved for retirement. This one perk on one card was worth it for me.
I completely agree with you. If you’re able to have that discipline with your cash flow you should take advantage with the rewards that credit cards offer. But for the college student that usually has to eat ramen noodles from time to time would have to learn the hard way to not trust the plastic card and run it to the max every month. I think this blog is worth showing to the teenagers that just graduated from high school and showing them the right way to use a credit card and not use it as a life line. It will eventually come back and hunt them when trying to establish credit and buy a car or house.
I agree w/ items 1-3 even before I read this article.
I guess my brain isn’t wired to understand the whole “temptation to spend” argument used against credit cards..
I see Credit cards as a tool for conducting commerce, no different than a check or cash, or debit. I feel the same about spending regardless of how I’m spending. And I make my spending decisions based off how much I have in the bank, how much I’ve already spent that month, and how much I want to save. I don’t even know how much credit I have available.
So I use credit most of the time because of the cash-back rewards are a nice little bonus. Think about it the credit card company gives me money, an a higher credit score and I pay them zero interest, and zero late fees for the privileged.
It seems like that people who constantly argue against using credit cards can’t understand people like me (or us). We aren’t emotional spenders, and we don’t see much of a difference between the different tools of commerce in our spending habits, we use the tools that give ourselves the most benefit. And for us currently there is nothing better than a Credit Card.