Think You Don’t Need a Credit Card?

You know, I read an interesting study the other day about Millennials and credit, and in the study, it stated that Millennials utilize personal loans at a rate of 98% higher than the previous generation, and they open auto loans at a rate that’s 21% higher than the previous generation, but they also open far less credit card accounts, averaging two less credit cards than their parents.  At first glance, those credit card statistics sound pretty good, don’t they?  But does it really make sense not to have some credit readily available on credit cards?

While a personal loan looks good on paper, what with the lower interest rate and all, there are drawbacks that you might want to consider before you decide not to open any credit card accounts.

First and foremost, available credit on a credit card is instantly available. Unlike a personal loan, which can take a couple of days between the time you apply and the time the money is deposited into your bank account, the amount of available credit that you have on a credit card is available at all times, day or night, regardless of where you happen to be at the time (ever had an emergency when you’re on a road trip – a personal loan doesn’t work at 3:00 am when you’re 300 miles from home).

Secondly, with a credit card, you can actually pay the balance off every month if you so choose and never pay a penny’s worth of interest.  That’s not the case with a personal loan.  Even though the rate on a personal loan is usually substantially lower than a credit card, you’ll still pay interest on the principal every month.  Over time, even that lower interest rate will add up.

And finally, even though many personal loans are reported to the major credit bureaus, not every company does, and what’s reported won’t show available credit, so your credit score may be impacted by not having any readily available credit (that’s about 30% of your credit score).

So, what should you do if you’re trying to limit your reliance on credit cards?  The answer is pretty simple – get at least one good credit card, use it sparingly, and pay off the balance every month!  That way, you’ll have the benefit of instantly available credit when you need it, but you can opt to pay no interest at all just by paying the balance in full when it’s due.