How and why 25 percent of Americans live a cash-only life
By LaRita Heet
Is there life without credit cards? And if so, is it worth living?
In today's instant gratification world, the thought of forgoing credit cards in favor of a cash-only lifestyle seems as foreign as mailing a handwritten letter through the post office: We know some people do it, but it's hard to understand why.
Yet there are those who have declared, "Enough is enough!" and dedicated themselves to lives sans credit cards.
According to the Fair Isaac Corp., creator of the popular FICO credit scoring model, about 20 to 25 million people in the United States do not have anycredit. An additional 30 to 35 million U.S. residents have a minimal amount of credit history, according to Fair Isaac statistics. These figures mean that approximately one in five people Americans do not have access to traditional credit.
The Federal Reserve Board Survey of Consumer Finances of 2004 showed that as many as one in four U.S. consumers live without credit cards. This triennial study of approximately 4,500 respondents showed that 74.9 percent of those surveyed had credit cards. José Garcia, senior researcher at Demos, a national, nonpartisan, public policy research organization, divides noncardholders into two groups: those who are unable to obtain credit cards, and those who choose not to use them.
No credit, no choice
According to Garcia, many of those without credit cards simply do not qualify for credit due to bad credit, no credit, immigration status or another reason.
Gail Cunningham, senior director of public relations for the National Foundation for Credit Counseling (NFCC), says such mixed feelings over credit cards are common. When, during NFCC debt-counseling sessions, debt-ridden consumers -- many of whom have already had their charging privileges suspended by the lender due to nonpayment -- are asked to cut up their credit cards, the reactions are often extreme. "Some people are like, 'Give me those scissors! I never want to see plastic again,' while others will clutch one of their cards close to their heart and say, 'I loved this card,'" says Cunningham.
The downside of no credit cards is that if you don't have extra cash on hand for emergencies, what do you do if you don't have that emergency card?
-- Ashkan Amouzegar
Business consultant who has eschewed credit cards
No credit by choice
Fifty-eight percent of credit cardholding households surveyed in the Fed's Survey of Consumer Finances had balances on their cards, and until a few years ago, J.D. Roth and Ashkan Amouzegar were among them. Roth, 39, of Portland, Ore., has charted his foray into a credit cardless lifestyle on his popular personal finance blog, Get Rich Slowly.
Amouzegar, 30, a Portland, Ore., resident and business consultant in merchant financial services, made the decision to stop using credit cards two years ago. Though the anti-credit card crowd decline plastic for reasons ranging from anti-debt religious convictions to extreme wealth (and lack of "need" for credit), Roth and Amouzegar stopped using credit cards to help rein in their spending habits and control their finances.
Amouzegar -- who once had 12 credit cards -- used to think nothing of using his plastic to buy his friends rounds of drinks and expensive dinners. Once, he confesses, he even took a monthlong trip to Paris with a friend -- and the entire trip was charged on his credit card.
"Through college and after, I used credit cards religiously and part of the problem was my irresponsibility of using it incorrectly. Most people, I think, don't view credit cards as a loan from the bank, but as extra income, and I viewed it as, 'Oh, my Citibank has a $5,000 limit' -- I thought it meant, 'I have $5,000 to spend now,'" says Amouzegar.
Amouzegar, now only two years away from being completely debt-free, chose to not only discontinue using his cards but to cancel all the accounts, including his "emergency card." The downside of no credit cards is that, even though financial experts advise consumers to save from three to six months' worth of income in an emergency savings fund, Amouzegar says, "Well, for a lot of people, that's not realistic. If there is a major car repair or something happens, what do you do if you don't have that emergency card? Knock on wood, I haven't been in that situation yet, but you never know when your refrigerator is going to go out. You never know when your car's going to blow up, or that you need to fly somewhere due to a family emergency."
The alternatives to credit cards
Visa or MasterCard debit cards: Though a MasterCard or Visa debit card is typically a good credit card substitute, the downside is that, when it comes time to reserve a hotel room or rent a car, there's a good chance that the hotel or rental card agency will create a $200-$500 or more "hold" on the debit card, and leave you with significantly less available cash in the bank.
Emergency fund: Financial experts recommend saving an emergency fund of three to six months' worth of living expenses in case you face an unexpected job or financial crisis.
Installment loans from banks or credit unions: There are different installment loans available for different situations. The interest rates will be is fixed, with a set payoff date.
NFCC's Cunningham agrees. "None of us has a very well-polished crystal ball to know what tomorrow's going to hold, and this person not using credit might think, 'I don't care; I'm not going to need credit in the future,' but we really don't know that," she says.
Like most noncredit cardholders, Amouzegar uses his Visa-logo debit card in those situations that traditionally demand a credit card: renting a car, booking a hotel room, purchasing airline tickets and making online purchases. He has run into occasional glitches renting cars with his debit card, as on a recent vacation. "The downside was, when I went to Maui, they would have done a charge authorization on a credit card, but since I didn't have a credit card, they did it on my debit card, so they basically held $250 until I returned the car. So that tied up $250 out of my checking account."
In 1998, GetRichSlowly's Roth paid off his high-interest credit card debts with a lower interest rate home equity loan and now pays a single monthly payment. "When I did that, I made a vow to myself -- and I promised my wife -- that I was going to cut up my credit cards, and I did," says Roth. "It's perfectly possible to live a happy life without credit cards. They're not a requirement. It seems to me that in our society, we get hung up on the fact that we must have credit cards, but it's just not true."
"The reality is that the practices of credit card issuers can be harsh on individuals," Demos' Garcia says. "It is those types of practices -- tricks and traps -- that I think will stop consumers. I think we're seeing it more now due to that -- that people, after a bad experience with a credit card, have stopped using them."
Although it's easy to blame the banks for high credit card bills, skyrocketing interest rates, and never-decreasing card balances, Amouzegar says that while card-issuing banks may be "crafty," they are not dishonest. Instead, it's the fault of the cardholder when debts get out of control. "Those people might just be making minimum payments on a really high interest rate. I would question, 'How did that interest rate get sky-high?' Did they make a late payment before? Interest rates don't just automatically go to 18 percent or 24 percent -- there has to be something done by the cardholder to trigger the rate to go from a preferred rate all the way up."
Revolving vs. nonrevolving credit
Before canceling credit card accounts, stop to consider the long-term implications on your credit score, says NFCC's Cunningham, noting that both revolving credit (in the form of credit cards) and nonrevolving credit (in the form of installment loans, such as auto loans, mortgages or other fixed-rate loans) are factored into a person's credit score. "The elements that are weighed to create your credit score include a review of different types of credit, and how you handle those. For instance, a credit card is going to demonstrate how, if you pretty much have an open-end except for a credit ceiling, you can charge varying amounts each month, thus your payment each month is going to be different, and they like to see how you handle that, versus a fixed-rate loan," she says.
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Those who have paid off and then canceled their credit card account may end up "hamstringing" future efforts to obtain credit, because that old account will eventually rotate off your credit report after a period of time (usually seven years), says Cunningham. "It's better to leave it open, because this is another element that is weighed in the credit-scoring model: They like to see longevity. They like to see that you've had an account open for a long time and handled it responsibly."
Closing a credit card account can also adversely impact your credit rating by changing your debt utilization ratio -- the amount of money you owe as compared to your available credit. For example, if you close an account with a $1,000 credit limit, your overall available credit number will lower, consequently skewing your debt utilization ratio.
The bottom line
Ask any personal finance expert, and she will agree that credit cards themselves are not the cause of anyone's debt. Instead, it's the misuse of credit that is to blame. Cunningham jokes about a sticker some debtors apply to their mirrors, which states simply: "You're looking at the problem."
Many people, once they've paid off their debts, are anxious to jump back on the credit card express to Debtville, says Cunningham. "A lot of people want to re-enter the world of credit simply because we live in a credit-dominated society."
"I think the most important thing is, get your credit card and pay it off at the end of the month," Garcia says.
According to Demos' research, many of those who don't pay off their balance in full every month simply cannot afford to, says Garcia. An increased cost of living, a set income and the lack of a financial safety net lead a lot of people into deepening debt, Garcia says. "So it's not as simple as wanting to pay your credit card off. But if you can, pay it off. That way, you have a revolving line of credit, which is very useful. It's short-term loans. Take the money upfront and then pay later so you don't pay any interest rate or fees. But again, that's not necessarily the reality with a lot of Americans and low-income individuals now that we're close to a recession."
Will Amouzegar rejoin the Land of the Plastic once he's paid off his debt? "No," he says without hesitation. "I personally don't have the restraint to not view credit as extra income. I think that after the process of having been in debt and paid it off, I think I've learned my lesson, but still the temptation is there."
"Ultimately, credit card companies are really a game, and you really have to be an educated consumer, and I think, be aggressive with them, because they bank on you not having knowledge," says Amouzegar.
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