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Credit vs. Debit: Your Cards Don’t Have to Be Costly

Written by Nickel - 7 Comments

Credit vs. Debit

On Friday, I shared an anecdote about a woman with (at least) 30 credit cards in her wallet, and I talked a bit about the cards that I carry in my wallet. I also asked you guys to share details about your situation, and the general consensus seemed to be that most of you carry somewhere between 2-4 credit cards.

There were, of course, several readers who don’t use credit cards at all, and I think that’s great. In personal finance, as in other areas of your life, it’s important to do what works for you. That being said, a reader named Dave left a comment that just left me shaking my head:

I do not have any credit cards because I do not spend more than I make. If I buy clothes with my debit card then it would cost me $100 bucks, but with a credit card it would cost me $100 plus $10 interest.

Based on the above, it seems that Dave doesn’t fully understand how credit cards work. Either that, or he was trying to be dramatic. Regardless, there are some important issues here, so let’s dig in…

For starters, I couldn’t agree more with the “spend less than you earn” mantra. Credit cards most definitely give you the opportunity to over-extend yourself, so you need to be careful. At the same time, however, just because you use a credit card doesn’t mean you’re living beyond your means.

As for me, I like using credit cards because: (1) they’re convenient, (2) they provide me with what is essentially an auto-generated spending report (the bill), and (3) assuming that you choose wisely, there are some fairly generous credit card reward programs out there. While you can capture #1 and (to a certain extent) #2 with a debit card, my experience has been that debit card rewards pale in comparison.

Another non-trivial concern with debit cards relates to fraud protection. While debit cards carry many of the same protections as credit cards, fraudulent activity typically results in an investigation before the questionable charges are eventually reversed, during which time your bank balance might be tied up. But I digress…

Of course, these benefits will be swamped out by interest charges if you don’t pay your balance in full every month. The answer here is simple – don’t carry a balance. Despite Dave’s concerns about paying more with credit, that’s only true if you don’t pay your bill in full and on time. Assuming that you have the money in the bank, you don’t have much to fear here.

But… Even if you’re not carrying a balance, it’s possible that you’re spending more than you might otherwise spend thanks to your credit cards. In fact, it’s been argued that the average credit card user spend more than those who use cash. And what good are 1-5% rewards if you’re spending 20% more thanks to that piece of plastic in your pocket?

If you’re a credit card user and you’re unsure about how they affect your behavior, then I suggest running an experiment. Closely track your spending for a month (or two or three) with a credit card in your wallet. Next, throw your credit cards in your sock drawer and repeat.

Did you spend more with your credit cards than without?* I’d be willing to bet that, in many cases, the will (over the long run) be fairly similar if you simply replace your credit card with a debit card. Sure, the transition to a debit card will help to reign in the most egregious over-spenders because they won’t have the necessary bank balance to support their spending, but it may not do as much for everyone else.

If you really want to modify your spending behavior, you might want to try banishing your cards entirely – including your debit card. In this case, I have little doubt that your spending will decline, primarily due to the huge inconvenience associated with navigating the modern world without plastic. If you lead an entirely local life, this might be an option for you. But if you shop online, travel, etc. then this probably isn’t an option.

As for me, I’m comfortable with our spending levels and unwilling to forego the convenience of carrying a card. On top of that, I’m confident that we have the discipline to keep our spending in check, so I’m not particularly concerned about the credit vs. debit debate when it comes to spending patterns.

Given the above, along with the differences in fraud protection (at least as it relates to your balance getting tied up while the charges get sorted out) and the availability of more generous reward programs, I’m not planning on ditching our credit cards anytime soon.

*Note: If you end up trying this experiment, please send me the details. I’d love to hear how it worked for you, and/or to share the results with other FCN readers.

Also, make sure you’re using the best credit card for your spending needs. Here are some great card deals to consider:

Published on May 2nd, 2011
Modified on November 16th, 2011 - 7 Comments
Filed under: Credit Cards

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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7 Responses to “Credit vs. Debit: Your Cards Don’t Have to Be Costly”

  1. 1
    Chris Says:

    If you keep a tight budget, then your total spending is the same regardless of whether you choose cash,debit or credit. If you ever pay interest, a fee or even over-spend on a credit card. The problem is YOU, and not the plastic in your wallet.

  2. 2
    Ginger Says:

    I’m with Chris. I started with using cash, back in the day, (10 years ago) and now primarily use credit. I still keep to my budget and now I get cash back. If you have self control it does not matter if you use cash or credit. You still can go get more cash if you want so it is not like using cash will stop the spending.

  3. 3
    Carol Says:

    I get that some people do spend more simply by using credit vs cash, but I’m not one of these. I track every penny I spend and allocate it into budget categories on an excel spreadsheet. I’m fiercely anal about this. I know exactly where my money is going and would spend the same, cash or credit. The downside for me spending in cash is I’d feel nervous carrying around that much cash. I maybe keep 20 bucks in my wallet for emergencies. I think the experiment idea is a fabulous one and the best advice is for people to do what works best for them. It’s OK if you’re not responsible with credit cards, but be aware of that and take measures to correct it (like getting rid of your cards). One of my weaknesses is forgetfulness. I’m aware of this. So I have tons of little calendar reminders that pop up. We all have weaknesses. Just get to know yourself and be aware of them. Denial is the worst thing you can do.

  4. 4
    Steve Says:

    I am 100% sure I would spend less on all-cash, but only because it would be such a pain to get my own money into a spendable form. I would not spend less if I used a debit card; and meanwhile I wouldn’t be earning 1-2% cash back. I use the “pay yourself first” method to create my artificial scarcity.

  5. 5
    Kevin R. Says:

    Debt is not the same thing as credit. Having credit means that, as a borrower, you have established a mutual trust with a lender. However, undisciplined and excessive use of credit can quickly lead to debt. [Crown Financial Ministries]

    No need to do your experiment, I did it back in the late ’90’s and sure enough I spend less with cash, more with a debit POS card and more with credit. I did learn the hard way & had a “parent loan” dig me out, but didn’t cut up my credit cards. That maybe due to the mess was $1,200 not $12K — since then online “bill pay” has meant that I’ve been able to use both the convenience element and the unsecured loan part – just now that loan is 4 to 7 weeks (time before interest kicks in) and I’ll pay at least the minimum due every week [never a late payment again] and MUST come up with a plan to pay in full by the due date. I guess I could have done the same in the ‘90, but it would have been many more trips to the post office and better discipline with pencil and paper.

  6. 6
    I pay Cash 4 everything Says:

    1) a debit card is as convenient and even more so then a credit card, you get one with your account. Plus your bank is much more friendly and the services rendered are much faster, then when dealing with a customer..dont believe me, dispute something on your debit card, and on your credit card..see witch one is almost pain free..and instantly solved..that would be the debit card.
    2)auto generated report? really cause you cant keep track of your spending? is it because the numbers are too big? Wow i can calculate everything and round if need be…all in my head. Your #2 reason is as dumb as your first reason, which neither are a valid reason to pay more.
    3)the perks? well lets talk about how a business runs. Well it would be lovely if the world ran off love, but last i checked it didn’t. Currency was key. There for no company dishes out more in rewards then it would take in, in money. The rewards you think are so great, if you broke them down into fractional values, and busted out the excel spread sheet, i bet the interest you pay per purchase is much more then the rewards you receive for that purchase. Or else that credit company would sink faster then the titanic.

    Use logic people, get off the hamster wheel. Yes everyone has the right to choose. However at least acknowledged your a idiot,and have no idea what your talking about, and we can be friends. If you need to spend money that you don’t have, maybe you should go to college and find a way to make more. Pay cash for everything, your debit card is fine, if you cant pay for it with debit then you cant afford it. Its a very simple cause and effect relationship. A 2nd grader could tell you, that if you dont have lunch money you cant buy lunch.

    The only time i see credit cards being acceptable to use, are when you cannot get a better job, cannot go to college, and will be stuck making less money then you think you should for the rest of your life!! Then by all means grab a credit card and spend away, because its not like your ever gonna be able to get out of debt anyway! spend until the floors go bankrupt from under your feet, who cares, you screwed your life away anyway. The only people who deserve credit cards are ones who f’ed up their life and are stuck making small amounts of money, or money that is not enough to satisfy their spending habits. Those people deserve credit cards, because they will never have the opportunity to make the money they want to make to support their lifestyle..

    however if it wasn’t for all you fools and your credit cards..my bank would probably charge a arm and a leg for service, but since they make so much off of you guys, everything is nice and easy for us cash buyers and debit card users. Try buying a car with a credit card and coming out on top after interest and payments, as apposed to a cash buyer. Not gonna happen, do the same with a house, not gonna happen. what logic tells you that credit line with any amount of interest even if its .01 is good? how does that not sink into your head? I dont understand why people willingly go into debt, or want to pay back more money then the product was worth, even if its only a few cents? does that make any sense at all?

  7. 7
    Matt Dailey Says:

    I have one burning question about credit card rewards. Who pays for the rewards? Does the merchant pay through fees? Do you eventually pay through late payment fees? Or if you don’t have any fees, do your rewards come from other customers’ fees?

    Rewards aren’t free for the credit card company (or are they?). So who pays for them?

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