Paper or Plastic?

You know the type. We've all got at least one of them. I'm talking about the friend who refuses to get a credit card (or any other kind of debt instrument) -- because he'd rather use cash. Credit, after all, is bad. At least that's what my anti-plastic friends tell me. Alas, I guess some people just have more money than sense.

Don't get me wrong, though. I understand their reticence. They're afraid of accumulating a bunch of debt. They're worried about not being able to control their spending. They're just plain worried in general. But they don't have to be.

If these people would simply open a few credit cards right around the time they become young adults, they'd have little to worry about. That's especially true if they don't carry balances on their credit cards. Indeed, there is no reason to worry about credit cards if you're not paying interest on your charges. My suspicion is that a lot of these anti-plastic folks are afraid of not being able to control themselves. By not getting credit in the first place, they're saving themselves -- from themselves. If that's the case, then they've got bigger problems than credit.

Still, having a credit card (or several cards) is extremely important. When was the last time you bought an airline ticket with cash? How about renting a car? Are you aware that many rental-car companies pull your credit report if you use a debit card for payment? That credit inquiry, which is usually a hard inquiry, remains on your credit report for two years. Additionally, by using a credit card, you'll have a lot more buyer protection.

Oh, before I forget: even though banks tout the benefits of using debit cards, the funds are still tied to a bank account. If someone ever compromises your debit card number -- and plunders the bank account -- don't expect to be made whole the next day. It can take as many as ten days for your bank to reverse the funds -- and get them back to your bank account. In the meantime, you'll have to move fast to notify people you've written checks to. If you're not fast enough, you'll also be dealing with bounced checks and fees. It can become a nightmare posthaste. I could go on, but you get the point.

Building a credit history is also important for two more reasons: eventually you'll be in the market for a house or a car. These major purchases are rarely done in cash. Good luck trying to buy one of these big-ticket items without a credit history. Even if you manage to get approved, you'll being paying a hefty interest rate, which is used to compensate the lender for the additional risk you represent. Remember that it doesn't matter how responsible or nice you are. If you don't have a credit history that proves your creditworthiness, you'll pay for it in the form of higher monthly payments.

I'm certainly not against using cash -- and staying out of debt. But a more reasonable (and balanced) approach would be to have a few credit cards that you use on a fairly regular basis. Pay those purchases off in full each month (to avoid interest). You will have benefited from an interest-free loan for nearly two months (the billing cycle plus the grace period) and you'll be building up a credit history that will absolutely come in handy later when you call that mortgage lender or walk onto the dealership's car lot.

In other words, use cash -- and cash alone -- at your own peril.