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How to Thrive Without a Credit Card

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How to Thrive Without a Credit Card

Credit cards can be a blessing or a curse.

They allow us to buy things immediately that we couldn’t otherwise purchase. They help build our credit scores, which is pretty handy when it comes time to finance a car or buy a house. And they provide an extra layer of protection from theft.

But these conveniences come with baggage. According to the Federal Reserve, the average APR credit interest rate is 15.13% as of May 2019.

Ouch.

It’s easy to sink into credit card debt, but hard to climb back out. So it’s understandable why people want to avoid credit cards. They can be tempting, especially if you’re a spender.

But that raises the question of how to live without a credit card. That’s where this article comes in. Here’s how to thrive in your day-to-day life without a credit card:

Build an emergency fund

One of the first goals of living credit-card-free is to build up an emergency fund. This amount will look different from person to person since everyone’s needs are unique, but a lot of people aim for a $1,000 emergency fund.

This provides a safety net for unexpected expenses, such as car damages or visits to the emergency room. Ideally, you’ll replenish the emergency fund as soon as possible after dipping into it.

With an emergency fund in place, you won’t have to rely on credit cards for immediate access to money. Using credit cards for an emergency is one way people end up with massive debt. You can avoid that by saving up an emergency fund.

Even if you don’t end up using the fund, it will give you peace of mind knowing it’s available. You can spend your monthly budget knowing you have backup money to cushion unexpected expenses.

Monitor your spending closely

This is a good practice even if you do use credit cards, but it’s even more essential if you’re forgoing them. If you’re used to credit cards you may be in the habit of always feeling like you have money to afford something. Because you can always pay it back later.

But that won’t be the case if you get rid of them. Remember, you can’t go into debt to buy anything. So now you have to track and spend your money carefully so you always have enough at the end of the month.

There are a few ways to track your spending and you’ll have to find a method that you prefer. You can create a spreadsheet on your computer, use a phone app, or try pen and paper. A common way to monitor spending is to regularly look at your bank statement on your computer and phone.

But regardless of how you do it, tracking your spending is a must. As always, the goal is to calculate your monthly income and all of your monthly expenses. Then cut and lower costs until you’re spending less money than you’re making.

If you’re worried budgeting will end your fun, don’t worry. There are still ways to have a blast on a budget.

Try using a debit card

There are a few options when it comes to spending money, but an easy option is to use a debit card. Whenever you use a debit card, the money is pulled directly out of your bank account.

Instead of borrowing money with a credit card, you’re now using the money you’ve already earned with your debit card. That means no debt or interest rates.

Using a debit card provides a natural cutoff to your spending– your bank account hitting zero. If you try to purchase something for $200 and your account only has $100, guess what? Your card will be denied and you’ll suffer a little embarrassment.

But that embarrassment can be a good teacher. It conditions you to pay closer attention to your bank account and teaches you to spend less. More importantly, it prevents you from going into credit card debt to make purchases.

Beware: some banks offer a line of credit for debit cards. Meaning it’s possible to effectively turn your debit card into a credit card. Make sure you understand and turn down these offers when they extend them to you. Additionally, make sure your debit card will not work if there’s not enough money in your account.

Consider using a prepaid card

Prepaid cards are another alternative to using a credit card but work differently than a debit card. When using a debit card, it withdraws money directly from your bank account. When using a prepaid card, it withdraws money from a balance separate from your bank account.

Before using a prepaid card, you must first load money onto it. This adds a nice layer of security to your finances since thieves cannot acquire your bank information from a prepaid card.

Prepaid cards are also conducive to budgeting since you must constantly look at your balance before making purchases. It also conditions you to only move the appropriate amount of money to make purchases onto the prepaid card.

An important note: carefully research a prepaid card before signing up. Prepaid cards can have fees, including but not limited to:

  • Monthly maintenance fees. Sometimes these can be waived if you use direct deposit to your prepaid card
  • Fees for withdrawing at in-network or out-of-network ATMs
  • Fees for each purchase

Always carefully read the prepaid card agreement and ask the appropriate questions to representatives before signing.

Use PayPal for online purchases

PayPal is incredibly convenient for online shopping. You can create an account with PayPal that holds money, which you can use to buy online, transfer to your bank account, or send to someone.

The biggest benefit? It’s free. Yep, totally free. There are no service fees for having an account or transferring money to your bank or sending money to your teen at college.

You can connect your PayPal account to a bank account or use select prepaid cards. This is great for security since every purchase is made through your PayPal account. That means you never give your bank account information to sellers online, only to PayPal. And PayPal is an established, trusted brand servicing millions.

Manage minor inconveniences

Are there inconveniences to forgoing a credit card? Yes. But the good news is they can be managed with a little extra work and patience. For example, some purchases will require extra steps because you’re not using a credit card.

As mentioned earlier, debit cards link directly to your bank account while credit cards do not. That means there’s an additional risk to using a debit card.

If someone in a remote part of the world acquires your credit or debit card information, they can make online purchases with them. With a credit card, the fraudster steals money from the credit card company. That means the money in your bank account is safe and the credit card company will sort out the matter.

However, with a debit card, the thief is stealing from your bank account. While the bank should reimburse you, the process may take a while. On top of that, you will have to change your bank account information altogether.

With that in mind, here are a few ways you can improve your security with a debit card:

Use your bank’s alert system

Most banks offer a service that alerts you on purchases. You can set it up to text you every time a purchase over $0.01 is made. This way you are notified immediately of all expenses made from your account. If anything looks suspicious, give your bank a call and sort it out.

Use 2-factor authentication (2FA)

This feature is handy for preventing thieves from making online purchases. Normally, buying online would only require your debit card information and password. But with 2-factor authentication, a text or email is sent to you whenever a purchase is made. You must answer the text or email positively before the purchase will go through.

Keep little money in your account

The strategy here is straight forward. Fraudsters and thieves can’t steal a lot of money from your checking account if there isn’t a lot of money present.

You can open a second account and keep the bulk of your money there. Then transfer money between the accounts as you see fit.

This makes managing your finances more tedious, but it adds a nice layer of security and peace of mind. Not to mention it promotes budgeting since you know you can only make small purchases with the little money in your account.

Consider if this strategy is right for you

Living without a credit card isn’t for everyone, but it can be a necessity for big spenders. No one wants massive debts with high-interest rates. And the easiest way to avoid credit card debt is to simply not have a credit card.

If you plan on forgoing credit cards, use the tips mentioned here to navigate your new lifestyle. Your first goal is to save up an emergency fund. Then find an alternative way to make purchases, whether that’s a debit card, prepaid card, using hard cash, or a combination.

There are some small challenges to thriving without a credit card, but it’s definitely possible. You can navigate the minor inconveniences that come with this strategy by researching and planning.

Is living without a credit card right for you?

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How To Teach Your Kids About Credit Cards

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If you have kids in college, this article is for you. Teaching kids about credit cards is one of the most important tools you can give them The world of credit cards can be confusing and giving your kids a little education might save them a lot of headache and debt.

Students need to learn credit card lessons

BY JULIE JASON

Do you have children in college? Have you talked with them about how to handle credit?
When I wrote about this topic in 2008, students were inundated with credit card offers. According to Benjamin Lawsky, who, as a special assistant to the New York state attorney general, testified before the U.S. House of Representatives’ Subcommittee of Financial Institutions and Consumer Credit, “marketers set up tables in high-traffic spots on campus, such as cafeterias, student unions, bookstores, and other campus buildings … [and at] campus events including freshman orientation, activity fairs, athletic events and graduation fairs.”

Then came the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act).

Now, companies cannot sign up individuals under the age of 21 without a co-signer or proof of personal financial resources. Marketers offering incentives like pizza can no longer do so while at “an institution of higher education” or even within 1,000 feet of the school. They also may not make such offers “at an event sponsored by or related to” the school. Pre-approved offers of credit to individuals under the age of 21 also are prohibited.

Still, card offers are being made, and students need to know whether to act on them. You can expect that student credit cards will have less favorable terms than those offered to people who have a credit history; students are higher-risk borrowers.
Further, students, even those over age 21, may not understand that missing a payment or making a late payment not only increases the cost of credit, but also creates a negative credit history, something everyone should work to avoid.

“A bad credit history can make it harder for you to get mortgages, car loans and credit cards in the future,” explained Matt Schulz, a senior industry analyst at CreditCards.com, a credit card comparison website.

“If you do get them, crummy credit can also cost you a fortune over the years in the form of higher interest rates and fees. It can also stand in the way of getting a job,” explained Schulz.

What can a parent do?
Since going away to college is the first step toward independence, you want to be sure that you respect your child’s need for self-sufficiency. But that doesn’t mean he or she has to go it alone. There are simply too many serious, long-lasting repercussions.

Communication and planning are key.

First, before your child leaves for school, talk to him or her about the benefits and the detriments of getting a student card. Establishing a credit history is a benefit. So is learning the discipline of paying bills on time to avoid a negative history.

Second, research options together with your child. Look online at CreditCards.com (search for “student cards”), WalletHub.com (click on “Credit Cards,” then “College Student”) or creditkarma.com (go to “Credit Cards,” then “Student”). Consider the fees, rates and penalties of different cards, and make a joint decision on the type of card that might make sense. For example, you might consider prepaid cards or secured cards. Prepaid cards work like debit cards. No credit is extended. You prepay the card, and when the balance is low, you fund it. Secured cards require a cash deposit that acts as the credit line for the account. This allows a credit limit to be established, without risk to the bank.

Third, decide on an acceptable monthly budget and what to do if it isn’t followed.  Talk about how you would like your child to communicate with you if that happens.

Fourth, determine whether you and your child agree that he or she should not accept credit card offers before reviewing them with you.

Fifth, agree on how the two of you should check in with each other. Will you talk each month about finances, perhaps setting a date in advance? Will you encourage your child to let you know about challenges before they become problems?

In the beginning, your child will benefit from some gentle guidance. You don’t want him or her to be adrift in a financial morass that could have been avoided with a little planning and care. Financial literacy calls for learning a new skill, and it is not reasonable to expect a child to go on this financial journey alone.

For information on the impact of the CARD Act, read the Consumer Financial Protection Bureau’s report (the Card Act Report), which you can find at https://www.consumerfinance.gov.

* * *
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments ([email protected]). To hear Julie speak, visit www.juliejason.com/events.

(c) 2018 Julie Jason.
Distributed by King Features Syndicate Inc.

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Credit Card Debt: America’s Looming Crisis

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Almost a decade later, the 2008 financial crisis may seem like a distant memory to some. However, current trends in national credit card debt suggest that the next crash may just be on the horizon.

The Federal Reserve has reported that consumer credit card debt has reached a staggering $952 billion in the first quarter of this year. Comparing this to 2008, the year of the global financial crisis, the United States reached a record-breaking $1.02 trillion in outstanding credit balances.

Analysts are suggesting that if the total debt continues to rise at its current rate, the country is getting perilously close to another recession.

Credit Card Debt Has Been Steadily Increasing

The chart below outlays the revolving debt American’s have since 2010

credit card debt america

 

Over the last year alone, the total amount of consumer debt has risen by over $70 billion:

(Source: federalreserve.gov)

(Source: nerdwallet.com)

The reason behind this growth is contested amongst experts, but a prominent theory suggests that American consumers are simply becoming more willing to carry larger amounts of debt, increasingly so as the last financial crisis fades into memory.

Americans Aren’t Paying Off Their Debt

Over one third of American households remain in debt from a month-to-month basis, with the average level of household debt currently resting at over $15,000. In addition, the amount of interest being generated by these outstanding accounts is making it even harder for those in debt to work their way out of it.

American households that don’t carry a credit balance are more of a rarity than anything. Only 35% of credit card holders manage to fall into this category, using them to generate reward points rather than to borrow money they don’t have (time.com).

It is not uncommon for borrowers to ultimately wind up paying multiple times the original amount lent through interest (thedailycoin.org).

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Americans Are Saving Less Than They Used To

The last financial crisis caused a large portion of Americans to be much more frugal in their spending habits. In 2008, personal savings was roughly 4% of total income for the average American, which skyrocketed to 11% by 2012 (fortune.com).

Now that the current rate of savings has gone back down to 5.4%, it suggests that Americans are becoming increasingly comfortable with looser spending habits, relying more heavily on borrowed money for large transactions.

Average Cost Of Living Is Increasing Faster Than Income Growth

The average income of the American household has increased significantly over the last decade, but it hasn’t necessarily increased average savings per family. The cost of medical care has inflated by over 50%, and groceries are 37% more expensive than they were in 2003 (nerdwallet.com).

cost of goods vs income

Barack Obama’s plan for universal medical care promised to ease the average family’s medical expenses by as much as $2500. Since his election in 2008, however, premiums have increased by an average of $4800 per household (infowars.com).

(Source: mybudget360.com)

An Increasing Reliance On Subprime Borrowers

Over 10 million new credit cards were given to subprime consumers in the last year alone, representing a 25% increase from the end of 2014. This is the highest level it has ever been since 2007, right before the financial crisis.

On the other hand, banks that fall into this trend are making some efforts to keep history from repeating itself. One of the main strategies being employed requires the borrower to make an initial deposit that will represent the spending limit of that card (hotair.com). In the same way an auto loan is secured to the lender through the actual vehicle, having a required deposit may be an effective strategy to cover potential losses on credit loans.

Lucrative Returns For Credit Card Loans

There is actually a lot of variance in profit levels between banks when it comes to credit card loans. The industry average falls at around 12.4 cents per dollar on outstanding balances, but among the top-earning banks the average sits closer to 28.4 cents (creditcards.com).

Analysts suggest that consumer habits have a lot to do with some of the steep rates these banks are charging. Many borrowers can be reluctant to research what other kinds of deals are available to them and will pounce on the first seemingly reasonable opportunity they happen upon. In addition, credit lenders will often advertise rewards and discounts for their cards in order to distract buyers from high interest rates and hidden fees.

Read more: If you want to lower your student loan payment, click here

Banks Pushing Incentives For Credit Cards

Hundreds of reward-based credit card options are available for consumers, saturating the market with options. This variance in potential reward avenues give further incentive for the average consumer to own more than one credit card and add to the average household debt.

A recent study ranked the most valuable reward cards in terms of the monetary value of their rewards over a two-year period. The top 5 issuers were:

  • Barclaycard – $1,529 (Arrival Plus)
  • Capital One – $1,482 (Venture Rewards)
  • Chase – $1,338 (Sapphire Preferred)
  • US Bank – $1,151 (FlexPerks Travel Rewards)
  • Citi – $1,141 (Double Cash Card)

Comparing 2016 to 2008: Is The Threat Real?

As the previous evidence suggests, consumer debt is currently at the same place it was before the recession hit in 2008. While credit card debt certainly was a factor in the market crash, much of it was due to subprime housing loans. In 2016, the bubble is now being inflated by loans to foreign governments.

The Japanese government’s debt is now twice that of its national GDP, takes a quarter of its entire tax revenue just to pay the interest, and yet the U.S. government is willing to pay Japan to borrow money at negative interest rates. This trend has accumulated over $7 trillion dollars of debt, adding to the $19 trillion owed by the government in total (sovereignman.com).

Compare this to the $9.5 trillion owed in 2008, and you can see why a lot of experts are getting worried.

Conclusion

It is rare that events in history play out exactly the same in every respect, particularly in the realm of finance. However, the amount of similarities between pre-recession America and now are certainly raising questions as to how far away the next financial crisis really is.

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