Credit cards have dramatically changed consumer saving and spending habits. It would not be an exaggeration to say that credit cards have impacted personal finance as much as cell phones have impacted personal communication.

We won’t go through the history of credit cards, but as a financial product it’s relatively young. Credit cards as we know them today are a little more than 50 years old. That means Gen X grew up as credit cards became prominent and Millennials have never known a world without them.

The impact of credit cards is indisputable whether you are a credit card anti or pro credit cards.
It is important to understand the common myths, as well as the pros and cons of credit cards so they don’t derail your financial goals.

Let’s use this as an opportunity to quickly debunk some credit cards myths:

1. I need a credit card
Credit cards are not a necessity! If we stop to think about it, this thought process asserts that we cannot survive without borrowing from Visa, AMEX or MasterCard.

Insanity.

Despite popular belief, cash is still king and debit cards are accepted everywhere credit cards are. There are some restrictions on debit cards such as hotels or rental car companies that may put a hold on your debit card for the full amount until the transaction is complete, but if you have a card, use it for that and that purpose only.

2. Credit cards are necessary to build a credit score.
Credit cards are not the only way to develop your credit or to improve your credit score. For example, a college student came in for a financial counseling session. She was considering getting a credit card before she graduated. She wanted to build her credit to get a car loan and an apartment in the future after she graduated and secured employment. We accessed her credit report and it turns out she had an 800+ credit score. Credit scores range from 300-850, the higher the better. Anything over 720 is considered to be excellent credit. Upon review of her credit report, it showed she had a credit card account in good standing since 2006. Now since she was born in 1995, I was pretty sure that she didn’t open a credit card when she was 11.

Her parents made her an authorized user on one of their credit cards when she was a child. They never told her and did not give her access to the card. Most importantly they kept the card in good standing. As a 20 year old college student, she had 9 years of positive credit history. Much like using your parents’ Netflix or cable password, you can (legally) piggyback on someone else’s credit by becoming an authorized user on their account. Make sure it’s someone you trust and the account remains in good standing (paid on-time and in full).

Another way to build credit without a credit card is by paying installment loans (loans with a regular payment for a fixed period) such as car loans, student loans, mortgages. Paying the required payments on time will count towards your credit history and improve your credit score.

Finally, fixing errors on your credit report is also a way to improve your credit without getting a credit card. Errors are prevalent in credit reports and you shouldn’t be punished because of an erroneous entry on your credit report. Review your reports from the three major credit bureaus quarterly to ensure accuracy.

3. Carrying a credit card balance improves my credit score.
I’m not sure how this one got out into the ether, but

Credit bureaus measure utilization rates meaning what percentage of your available credit are you using. Your credit score will begin to go down if you are using more than 30% of your available credit, but you are not penalized for paying off your cards in full each month.

While we are at it, the number of cards you have is also not a factor. The average length of time you have a card is a factor, so you may see a slight decline after signing up for a new card, but the pure number of cards is not a factor.

Now that we have debunked some common credit card myths, let’s get into the pros and cons of credit cards:

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Pros
Ease of transactions
Grace period to pay for charges
Easy to track spending
Protection for fraudulent transactions and ID Theft
Rewards points/Cash Back/Airline Miles
Can be used to build credit score

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Cons
Significantly reduces the ‘pain’ of transactions, can lead to increased spending
Masks overspending with grace periods
Charge cards are designed to pay interest
Interest rates are high (average 15%+)
Credit cards rewards incentivize additional spending not saving
Late payments and high utilization rates can significantly reduce your credit score

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This is not an exhaustive list, but we have captured some key aspects of how credit cards can be both positive and negative. Personally we are not a fan of credit cards because

A cash back reward or miles is an incentive to spend, whereas a 401k match, for example, is an incentive to save.

There is a significant difference between pulling $50 cash out of your pocket and swiping a card. Pulling the $50 cash involves a bit of psychological pain. It forces you to observe how you are reducing the total amount of cash in your pocket in that moment. In fact it may cause you to make a different decision.
Did you know that it takes about 20 minutes for your brain to register that your stomach is full? That delay can cause us to overeat. Well when you use credit cards, that delay can be 30 days! You may not realize that you overspent until the statement comes in a month later. Pain is actually a sensation that gives us an indication that there may be something wrong. Removing the pain of financial transactions is not all positive.

Our purpose is not to say credit cards are evil and should be banned entirely. However, the average US household had just under $16,000 in credit card debt in 2015. That means thousands of dollars in interest payments each year are paid to MasterCard and VISA and not to saving or investment accounts. Giving your hard-earned money to credit card companies is not the way to financial independence.

Personal finance is just that, it’s personal. You need to know what’s best for your lifestyle. In our opinion, the benefits of credit cards do not outweigh the costs. Spend less than you earn with cash and build an emergency fund, and if there is an emergency; borrow from yourself, not VISA.