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Credit Cards vs Debit Cards – A Different Take

I hate the credit cards vs debit cards topic — so why am I writing about it? Because it seems to be a staple topic of the personal finance blogosphere! And almost universally, the conclusion will inevitably come down on the side credit cards as the better deal.

Warning: If you’re looking for that same conclusion here, you’ll be disappointed. Being contrarian by nature, here’s my take on the debate.

I think debit cards are the lesser of the two evils mostly because there’s little chance with a debit card that you’ll end up paying for this month’s expenses next month, next year or over the next 10 years. That ices it for me, but we can go on.

Credit Cards vs. Debit Cards – A Different Take
Credit Cards vs. Debit Cards – A Different Take
We can get into the mechanics of which costs more or has better benefits, but those are details that ignore the most important element: the human factor. If we’re all trying to get out and stay out of debt, spending with a credit card is a contradiction in terms.

Worse, for those who have dug themselves out of a debt hole and think that credit cards are now their friends, just remember that like an alcoholic, you aren’t cured, you’re just recovering. Why play around with credit cards when you got into trouble with them in the past?

The typical pro-credit card arguments

We’ve probably all read or heard these ad nauseam, but in the interest of balance, let’s do a quick recap:

  1. Buyer protection
  2. Rewards programs
  3. Identity theft (quicker reaction time than debit cards)
  4. Credit score enhancement
  5. No overdraft fees
  6. “I pay off my balance every month; I know how to manage money”

I’m not going to lie, there’s at least some merit to each of these, just not enough to swing the balance in favor of credit cards. A closer consideration of each is in order.

Buyer protection. A neat benefit to be sure, but in my opinion, one which is more than offset by all of the credit card gooble-dee-gook. Have you ever read a credit card contract? Read it sometime and then tell me that the once or twice in a decade that you’ll need buyer protection will be worth the risk you’re taking on by dealing with the card issuer. They have all the rights, and can change the rules at any time without your consent. Your only real option is to payoff your balance, close your account and seek a new issuer who will play more fairly. That’s an unequal relationship, and those are best avoided.

Rewards programs. In the past few years, many credit card issuers have scaled back their rewards programs, and some have completely eliminated them. In addition, card issuers don’t provide these rebates out of the goodness of their hearts. They’re doing it because a reward for spending will generate more spending! This is hardly what you need to be doing if you’re trying to get the upper hand on your finances.

Credit card companies collect money from both sides of a transaction, from you the borrower, in the form of interest and fees – and from transaction fees charged to the merchant. The more you spend, the more they make. They’re betting that human nature – coupled with a generous credit limit and a reward for spending – will overwhelm your will to resist splurging. Are you willing to bet yourself against that arrangement? Remember, the credit card companies have willing allies in the advertising culture who are working 24/7 to get you to buy what they’re peddling — even if you don’t need it. No plan can save you money by getting you to spend more money.

I don’t know about you, but I’m fully prepared to leave a few nickels and dimes on the table in favor of not spending my dollars.

Identity theft protection. With identity theft credit cards do offer better protection than debit cards, in that they’ll cover the cost of fraudulent charges almost immediately. Score one in the definite win column for credit cards. But identity theft risk can also be reduced on debit cards by maintaining a balance that closely matches your expected spending. The thief can’t access more money than you have in the account.

In addition, a Paypal account linked to your checking account can provide a secure way to make online purchases, one of the major areas of identity theft concern. And it costs nothing to add this feature. It’s also worth noting that the biggest concern with identity theft is not necessarily the thief’s access to a single account, but to the information linked to that account — a much bigger prize. On that count, credit and debit cards are an equal risk.

Juicing your credit score. This is the most tiring pro-credit card argument of all. In order to keep your credit score high, you need to maintain high credit lines with low outstanding loan balances — the credit utilization component of credit scores. While there’s truth to this assertion, it ignores the fact that credit utilization is only one component of your overall credit score. Paying your bills on time alone carries more weight, and so do pay histories on mortgages and installment loans. Other factors include the age of loan accounts and number of credit inquiries.

I don’t know about you, but I have better things to do with my time than to perpetually track my credit scores to determine that I have the proper balance of outstanding debt to available credit. If our plan ultimately is financial independence, our primary goal should be to stay out of debt, not to invest time figuring out how we can juice our credit scores. You mostly need high credit scores to obtain credit. The less dependent we are on credit, the less important our credit scores are.

No overdraft fees. Really? Ever hear of over-limit fees? They’re overdraft fees for credit cards. There will be a penalty for exceeding certain balances whether we’re talking debit or credit cards.

“I pay off my balance every month; I know how to manage money.” Congratulations, but you’re still playing with fire. Credit cards are set up to keep you in debt, not to help you manage your finances. Become too comfortable with them and you may be stepping into a trap you don’t fully understand. Today you’re managing your finances successfully, but in the future you could find yourself in a period of extended unemployment, and the balance may shift. When crisis hits, we tend to cling to what’s familiar – credit cards may prove to be a bad habit at that point.

The strongest arguments against credit cards

Given the uncertainty of the economy and particulary employment in the past few years, it seems the last thing the average person needs is more credit. As citizens and consumers, the best thing we can do for ourselves and for the country — long term — will be to live with as little debt as possible.

The Bible refers to debt as bondage, that the debtor is the slave of the lender (Proverbs 22:7) — does anyone disagree with that connection?

It seems to me that the goal of most all who seek to improve their lot in life would ultimately be the complete elimination of all debt, with credit cards at the top of the list. Why play with a convenience that has the easy potential to put you deep in a debt hole should the wrong combination of circumstances line up?

If you’re a recovering debt junkie, you don’t need to be carrying credit cards in your wallet. Would you advise a recovering alcoholic to get a night job as a bartender?

Finally, I like simplicity, and find it one of life’s more pleasurable traveling companions. If cash is the simplest medium of exchange, then debit cards are the next best thing. Credit cards mean complex contracts, interest charges (and changes), debt hangovers, potential spending binges and changes in terms at inconvenient times. You have none of that with debit cards.

None of this means that I think we should all go without credit cards (I have both myself). But there needs to be a hierarchy – with credit cards at the bottom.

  • Cash for small purchases (reduces bookkeeping, interest/fees and the likelihood of identity theft)
  • Debit cards for most other purchases
  • And credit cards for those rare situations where their benefits will provide the greatest advantage

Keep a credit card for those times when you specifically need buyer protection, or for the purchase of airline tickets if your card provides travel insurance at no extra cost. Keep the card out of site the rest of the time, which will cut down considerably on the possibility of running up a balance you can’t afford to pay off immediately.

My vote is for debit cards – what’s yours?

( Photo by Tony Webster )

9 Responses to Credit Cards vs Debit Cards – A Different Take

  1. I have never been a fan of a “put all your eggs in one basket” philosophy … so I believe there is a place for both credit cards and debit cards. You make a lot of good points in this piece. What is most important to me is that people actually understand the details of how each instrument works (including merchant fees, annual fees, swipe fees, etc.)

    Also EVERYBODY needs to accept this reality – whether you pay cash, or with a debit card, or with a credit care … YOU ARE SPENDING YOUR MONEY. It may feel like your just waving your magic plastic wand (card) and making something you want appear in your life. In reality, you are consuming something with money you received in return for value you either provided to others or are obliged to provide in the future – and I do believe that debt is financial slavery.

    If you don’t have the money right now in an account somewhere or in your wallet, you can’t afford the purchase. It

  2. In Economics we assume a rational consumer, in reality though, the consumer comes with emotions, habits and a lot of baggage all which affect their decisions. Strike one against the credit card! As you aptly point out, it comes down to a very irrational consumer who wielding a credit card can do much harm than good if irresponsible.
    Am also a huge believer in debit cards, its like carrying literal cash, if you don’t have it you can’t spend it and thus you are forced quite literally to live within your means and the knowledge than once you run out of cash you are burnt makes you rather cautious of your expenditure. At the end of the day, preventing debt is better, cheaper and less stressful than digging yourself out of it!

  3. Hi Simon – That does it for me too, that a debit card is much like trading with cash. Since you can’t spend more than you have, a debit card works as a budget control. A credit card holds rich potential to be the opposite.

  4. Let me preface my comment by stating that I don’t think CCs are the best choice for most people, since financial responsibility is hardly the norm. What may be an effective financial tool for one person, may result in total disaster for someone else. But I don’t find the arguments in this post all that convincing. They all seem to boil down to, “If you’re financially irresponsible, don’t use credit cards.”

    Buyer protection:
    Your argument against buyer protection never addresses why buyer protection isn’t a valuable benefit (no, “all of the credit card gooble-dee-gook” does not qualify). Yes, the CC company has the option to change the terms of the contract. But I don’t see how that diminishes the value of buyer protection. For someone who doesn’t carry a balance, I can see no risk whatsoever. If someone I do business with changes the terms of our agreement, I am free to find more favorable terms elsewhere. That’s freedom, capitalism, whatever you want to call it. And I love it! It’s the same with my job, local grocer, mechanic, etc.

    Rewards programs:
    My CCs have actually beefed up their rewards programs in recent years. I save hundreds of dollars each year simply by purchasing things with a CC that I would have purchased in either case. Honestly, I don’t see it as me against the CC companies. If they are making more money and simultaneously decreasing my expenses, I’m fine with it.

    Q: “Are you willing to bet yourself against that arrangement?”
    A: Yes.

    Identity theft protection:
    A thief can potentially access all the money in your account when you use a debit card. He can access none of your money when you use a credit card. Regarding online purchases, both of my CCs offer secure online account numbers.

    Juicing your credit score:
    “I don’t know about you, but I have better things to do with my time than to perpetually track my credit scores to determine that I have the proper balance of outstanding debt to available credit.”

    Were you intentionally being ridiculous here? I have never once thought about such a thing since my optimal amount of debt is zero, yet my credit score puts me in line for the lowest interest rates offered should I need it. Pay off your balance every month and you will be fine.

    No overdraft fees:
    I’m fairly certain that most CCs simply get declined if a person tries to exceed their limit. And actually, one of my CCs has a daily limit that is significantly below my credit limit. On my other CC, I have it set up to email me if a purchase exceeds a certain dollar amount or if my monthly balance exceeds a certain amount.

    “I pay off my balance every month; I know how to manage money”:
    I am very comfortable with CCs for the simple fact that I understand the consequences. Both using my CC and paying it off every month have become very familiar. So when I was unemployed for an extended period of time, in new city with a hefty apartment lease, with a baby on the way, and stuck paying extremely high COBRA premiums because we found out we were pregnant 2 weeks after I was laid off, I stayed with what was familiar…paying my balance every month. It’s no coincidence that so many financial “experts” suggest having a healthy emergency fund.

    The strongest arguments against credit cards:
    I mostly agree with your closing points. A small minority of the population is truly responsible enough to manage their CC use in good times or bad. If there’s even an inkling that a person may fall off the debt-free wagon, CCs probably aren’t the best option.

  5. uclalien – You’ve given a thorough counter opinion to the post, and I appreciate your comments. My response is written in the post, so there’s no point in rewriting it here.

    The post is my argument against the prevailing benign view of credit cards, and I stand by it. Many of the justifications for credit card use are, in my opinion, rationalizations. If achieving financial independence is a goal in anyones life then they don’t need to be flirting with debt instruments, especially credit cards.

    We can agree to disagree, and having worked in credit, and having seen the damage that can be done, I prefer to take the position of “watchman on the wall”. Too many credit card proponents paint too rosy a picture of them, and the last thing I want to do is jump on that bandwagon.

  6. I only have two credit cards, and one of them is very sad and is getting psychological counseling because it is so lonely. I got that one years ago for one reason and one reason only: to be able to buy plane tickets online, which, at the time, I couldn’t seem to be able to get to go through the transaction with my debit card. Last year we got another credit card for traveling abroad (one with no foreign transaction fees) and cash back, and now that has made the first card really Blue.

    (Had I not married a foreigner, I’d probably have never bothered to get a credit card out of sheer laziness and wish for simplicity, since debt is “against my religion”)

    This said, I am using the credit card for food purchases for the cash back and am paying it off online through bank transfers more than twice a month just to be ultra on top of it.

  7. Great idea to use the credit card for airline ticket purchases – though I have had no problem doing the same with debit cards. I don’t know about using credit cards for groceries though. It holds the possibility of converting very short term consumer items into long term debt in a financial or career problem.

  8. “It holds the possibility of converting very short term consumer items into long term debt in a financial or career problem.”

    Not for me. Really. If someday hence I were to start charging my groceries to my credit card and not paying them off, but instead carrying last year’s groceries as a balance and paying interest on them, *that wouldn’t be me*. I don’t know who that guy would be, but he wouldn’t be me.

    Sure, in life “anything is possible”, but if that is true what’s to stop any of us from applying for a credit card online right after reading the rest of this comment, getting it, and running up $2k worth of online gambling debt within the next 10 days? Should we also not use computers, then? My point is, you play the probabilities, not the possibilities (at least in this case). I see you feel otherwise, and I can respect that.

  9. mc – “I see you feel otherwise, and I can respect that.” – Thanks, but yes, it’s obvious that I take the counter postion. The more limited the use of credit cards, the better.

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