The Big Debate #3: Credit Cards or Debit Cards?

?This week, The Simple Dollar is taking a deeper look at five common personal finance debates.

Several people I know have made the active choice in their life to completely avoid the use of credit cards.

In the modern era, this seems like an almost shocking choice. Credit cards seem like the foundation of basic money management. We use our plastic everywhere as a matter of course, a fundamental part of how we do things like buy groceries and household goods and make other purchases.

Yet it’s a lifestyle choice that many make, and it’s actually not as difficult as it sounds. Over at No Credit Needed, there’s a great explanation of how one guy gets by using just cash and his debit card, no credit at all.

Is this a reasonable lifestyle choice, or is it just foolishness? Let’s take a look.

What Are The Options?
Credit card users are in the clear majority here. NewsHour reports that in 2001, 76% of Americans had at least one credit card to their name, and that number has certainly increased since then. Many credit card owners use their cards responsibly but frequently, taking advantage of the buyer protections offered by credit cards and the convenience of using them to facilitate day to day purchases. I know I’m certainly in that camp.

So what do the rest do? No Credit Needed explains things very clearly: a mix of electronic transfers, debit card usage, checks, and cash use. Coupled with a clear budget, this enables people following this kind of system to never “accidentally” slip into credit card debt – it provides a nice barrier of protection.

What Are The Big Differences?
The biggest difference between the two perspectives rests in the functional differences between a debit card and a credit card. A credit card tends to offer significant buyer protections and allows you to make any purchases you like up to your credit limit, but that’s a double-edged sword – you have a bill to pay, after all. A debit card may or may not offer buyer protections (you’ll have to talk to your bank to find out) and your limit is effectively the balance of your checking account, since any purchases on a debit card are directly pulled from there. There’s no bills at the end of the month, though, and the only danger is overdrafting.

So What Should I Do?
First of all, regardless on your feelings on the use of credit for regular purchases, it’s worthwhile to get a credit card. Establishing a positive credit history can only help you in life – it helps with insurance rates, the interest rates you might get on car loans and mortgages, and so on. If you object to using credit, just get the card, register it, put it back in the envelope, put it in a safe place, and forget about it.

Now, what about the use of credit cards in day to day purchases? I think it really comes down to psychology – do credit cards create a psychological temptation to spend more than you should or perhaps create a feeling of unease and a lack of trust in your own spending habits? If credit cards trigger either of these responses from you, then you’re likely better off not using one, because the concept of using a credit card is inherently altering your spending. Again, No Credit Needed explains it rather well – his debt was out of control and it was clear to him that access to such easy credit was a big part of the problem.

I think a period of “credit abstinence” is actually useful for many people, as it provides an opportunity to re-evaluate your priorities without an increase in your debt load. However, the convenience, buyer protections, and rewards of credit card use make it a valuable tool if you use it wisely – don’t carry forward balances, avoid “accidentally” being late, and so on.

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