Smiley has lived without a credit card for more than four years, and she doesn't miss it a bit.
"I got my first credit card when I turned 18, and I just got used to using credit to pay for things," says Smiley, a single parent who was also the caretaker for her mother when she decided it was time to eliminate her debt.
Smiley had accumulated about $38,000 in credit card debt and was tired of spending all her income on credit card payments. She arranged a debt management plan through CredAbility, a credit counseling service in West Palm Beach, Fla., and repaid her debt in four years.
As part of her debt management plan, all of her credit card accounts were immediately closed. "I have to admit it was hell in the beginning, like going from eating lobster and caviar to a starvation diet," says Smiley. "It was really hard to say that I couldn't afford something and that I had to save for it."
Not Accepted Everywhere
Smiley got around the need for a credit card for flights and online shopping by using her debit card. But it wasn't always easy.
Some retailers won't accept a debit card unless it has a Visa or MasterCard logo. And many hotels and rental car companies only accept credit cards, or will place a hold for hundreds of dollars on a debit card until the customer vacates the room or returns the car.
That means you need to make sure you have enough money in your bank account to cover the bill. "I always had to make sure I had at least $150 or more extra in my checking account when I rented a car," says Smiley.
In spite of her $970 per month payments on her debt management plan, Smiley managed to save an emergency fund of $3,000 that she uses as a back-up to her checking account.
How to Make It Work
If you decide to live without a credit card, you'll need to develop plans to pay for everything beyond your normal expenditures, such as vacations, gifts, car repairs and unexpected health care needs.
First, establish your emergency fund with three to six months of living expenses. Most financial experts suggest that you have a set amount transferred from each paycheck to build up your savings painlessly.
For health care costs, Smiley set up a health savings account at work where she saves pre-tax money for out-of-pocket health care spending. "I needed a root canal and I had to tell my dentist that I didn't have a credit card and I didn't have enough in my HSA to pay him," says Smiley. "He let me make a down payment and then make payments slowly until I accumulated enough in my HSA to pay him in full."
Next, try some other tried-and-true methods like putting your change in a jar or putting cash in envelopes labeled for each savings goal. You can open a holiday or vacation savings account at a bank or just open an online savings account and give it a nickname so you know the purpose of the account.
You'll also need to figure out how to pay for things without a credit card, such as:
- Layaway. Many stores allow you to hold an item and make payments until the item is paid in full.
- Debit card. Make sure you read your debit card terms and conditions so you know if you are protected from unauthorized charges. In addition, you'll need to keep careful track of your bank balance or have a savings account tied to your checking account for overdraft protection.
- Cash. Be careful not to carry too much. And remember to track your cash spending.
- Checks. As long as you have identification, most retailers still let you write a check.
- PayPal. Most online retailers, including many airlines, accept PayPal. You can tie your account directly to your checking account.
- Pre-paid cards. You can load funds onto a pre-paid card and use it like a debit card. Check to be sure you don't have to pay high fees to use the card.
If you don't have a credit card because you have bad credit or because you have an aversion to borrowing money, you should check your free credit reports at annualcreditreport.com and pay to get your credit score.
Your credit score is based on a history of credit repayment, so a lack of a credit history could hurt your chances of a mortgage loan approval or car financing.
If you plan to live on cash forever, this is not a problem, but if you think you'll be applying for a loan in the future, you may need to obtain a credit card and use it occasionally to establish a positive credit history.