Credit vs Debit Cards

I recently read an article on AOL regarding the alleged "drawbacks" to using a debit card instead of a credit card for purchases. The article claimed that making credit purchases were "safer" because there were more protections on credit cards than on debit cards. It even went so far as to claim that using credit cards can save you money because of all the perks they offer, like travel discounts; and that you can "earn" money by keeping your cash in an interest bearing account until the time comes to pay the credit card bill.

As I read the piece, I could not help but wonder if the author's paycheck was being signed by an exec at Visa. After all, who benefits the most from convincing consumers that it's better to use their credit cards?

So here's the other side of the story:

When you use a credit card to make a purchase, what you are doing is spending someone else's money. Needless to say, the credit card companies are not going to "loan" you their money without getting something in return, in the form of interest, fees, penalties, etc. Because of all those fees, and the good chance that you won't be able to pay off the whole "loan" at the end of the billing cycle, that blouse you bought "on sale" for $20 is likely to cost you twice as much by the time you pay it off. As for keeping your money in an interest bearing account, what the article doesn't mention is that you're likely to earn about 2-3% interest on your money, but pay anywhere from 12-30% interest on those credit card purchases.

Saving money? I don't think so.

Debit cards are different. Although most now carry the Visa or Mastercard logo, and work exactly like credit cards for making purchases either online, over the phone, or at your local mall; what they don't do is loan you money. The money you spend is coming from your own checking or savings accounts - which helps ensure (provided that you are responsible about paying your primary bills before going shopping) that you cannot spend more than you can afford, as your spending limit is equal to your bank balance. Further, most banks do not charge a fee for using a debit card, unless you use it to take out cash at an ATM. But you can avoid that fee entirely by taking cash back when you use the card to pay for groceries or other items at your local store instead.

Most importantly, debit cards help you live within your means, which is the best possible way to avoid ending up thousands of dollars in debt and risking bankruptcy. As for security, although most terminals will only ask you for your PIN number when using a debit card for a purchase, you can select an option to sign for the purchase as well, which offers much more protection than using the PIN alone. Or you can simply select "Credit" even though you're using a debit card. Most terminals will process the card under the type you select, as long as it has the proper logo/encoding.

Personally, I don't own a credit card, nor does my husband. We have debit cards attached to our checking account, and that is all we use for everything from paying the electric bill to buying food and gas. We can easily check our balance online or by phone at any time, and we never pay a penny in interest or late fees. When we want to purchase something that we can't currently afford, like a new TV or refrigerator, we save up for it and watch the sales circulars. When the time and our finances are right, we buy it. This makes managing our money simple, and ensures that we don't end up in debt.

Depending on the circumstances, some may feel it's good to have just one credit card for emergencies, like if your car breaks down three days before you get paid. But the problem with this is human nature. Little by little, things that really aren't urgently needed will seem like they are, because you know you have the ability to get them on someone else's "dime". Because of this, it's highly likely that when your car does break down, you'll already have used up your credit limit and have to get an increase, loan, or second card to cover the cost of fixing it.

It may take decades before we can actually elect someone who will be responsible about managing the federal budget. But if they won't set the example for us, perhaps we should set the example for them instead. So I recommend that you cut up those credit cards, pay off the balances,and live within your means. It may take a while, but in the long run I think you will find you actually have more money left over at the end of the month that way.

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