Credit or debit? It’s a big debate in the world of personal finance, especially when well-known voices like Dave Ramsey have such strong opinions. Is it best to pay for everything with a credit card and earn rewards? Or pay with a debit card and avoid debt?
Let’s take a look at both options, the advantages and disadvantages of each (because there are both!), and discuss how to go about making the decision for yourself.
Paying With A Credit Card
The Good
Let’s start things off on a positive note. What are the benefits of using a credit card? The one most people first think of are the rewards that you can earn. Whether it’s points that can be redeemed for gift cards or miles that can be used for travel, most credit cards nowadays offer rewards.
Though many people focus on the rewards, the greatest benefit that credit cards actually offer comes in the form of security. Most credit cards have strong systems and policies that protect you against fraud. Also, if someone steals your credit card and runs up a large balance, it doesn’t directly impact your bank account, your actual money.
The Bad
The clear downside to credit cards is debt. The Bible warns against debt, it is financially expensive, and it brings stress to your personal and family life. Debt can create a downward spiral that is difficult to climb out of. Oftentimes, debt leads to more debt as your credit score tanks and all of your interest rates go up. As you can tell, I’m not a big fan of debt.
Paying With A Debit Card
The Good
What is good about a debit card? No debt. You can only spend money that you already have. No debt-induced stress and strain on your marriage, no paying for furniture after it’s already broken.
Also, using a debit card makes it easier to track your expenses, because they are immediately reflected in your bank account. With a credit card, you can make a purchase and not actually pay for it until a month or two later, even if you pay off your balance every month. It’s easy to forget purchases you’ve made and think you have more available income when it’s not immediately deducted from your bank account.
The Bad
I used to think there was no downside to debit cards. The credit card systems are more secure, but when you make a purchase at a store they give you the option of running your debit purchase through the credit system for that added security. (That’s why they often ask you “credit or debit?” even when you’re using a debit card.)
Then I heard a financial advisor talk about what happened when some unsavory person got hold of his wife’s debit card. Their bank account got cleaned out. And, even though the mess did get cleaned up and they didn’t end up losing any money, it took two weeks for everything to get sorted out. That’s two weeks with an account balance of $0. No money except what they had in their pockets.
Imagine, not only do you have no money to buy groceries, but all of the automatic payments you have set up would be rejected, possibly incurring extra fees. That doesn’t sound like fun. (Which is also why I would recommend keeping your emergency fund in a separate bank account.)
Making The Decision
So, neither credit nor debit is a perfect answer. How do you decide which to use? I think it all depends on your personality and tendencies.
My husband could get a job at Cheesecake Factory and not gain a single pound. Me… not so much. I know I have a weakness for sweets. So, it would be foolish for me to get a job there if I don’t want to get fat.
In the same way, if you struggle with controlling your spending, a credit card is probably not a good idea. If you have trouble remembering to pay your bills on time, you should probably stick with a debit card. The cost of paying interest on your purchases will quickly supersede any rewards you earn for using a credit card.
In making the decision between using credit and debit, you have to be honest with yourself about your weaknesses. Look at the advantages and disadvantages of each and evaluate how they affect you personally. Then, prioritize those advantages and disadvantages. What is the most important thing for you? Remember, different people will come up with different answers, and that’s okay.
The Best Of Both Worlds?
I recently came across something that appears to give you the best of both worlds. Debitize is a service that lets you use your credit card as if it were a debit card. How? You link your bank account to your credit card account. Then, every time you make a purchase on your credit card, they withdraw the money from your bank account and set it aside. When your credit card bill comes due, they pay it for you. You get the rewards and security of a credit card without the risk of missing a payment or forgetting that your money has already been spent.
I am in no way affiliated with Debitize and have not personally used it. I just heard about it recently and it intrigued me. If you have used it, please share your experience with us in the comments!
