“I believe that through knowledge and discipline, financial peace is possible for all of us.” Dave Ramsey
If you’ve been following me for any length of time you know I’m a huge Dave Ramsey fan. His influence has helped thousands of people across the world find financial peace through his Baby Steps plan. While I am a great admirer of his, I don’t blindly follow every baby step in his plan. One area where he and I part ways somewhat is in regard to the use of credit cards. He is a firm believer in getting a huge pair of scissors, cutting up all the cards, and closing the accounts. I’m not quite so anxious to stop using credit cards but I have disciplined myself so that impulse shopping is kept at bay.
Consumer protections for Credit Cards vs Debit Cards
The laws that govern credit cards and debit cards differ, and the protections offered to credit card users are significantly stronger than those for debit card users. For example, depending on when you report your card lost or stolen, credit card users may be held liable for only $50 worth of fraudulent charges. On the other hand, debit card users could be liable for up to 100% of any fraudulent charges. This does not seem right, nor is it logical, but the way the law is currently written could leave a consumer holding the bag for a thief’s shopping spree. More about the consumer protections for credit and debit card users can be found here.
I’ve always been a bit leery of using a debit card in place of a credit card ever since I witnessed something one of my customers experienced when I worked at a credit union years ago. She used her debit card to pay for a meal at a Chinese restaurant. While it was not malicious, an error was made in the processing of her payment. Over $80,000 was debited from her checking account. It was first of the month which meant the first check to be returned for insufficient funds was her mortgage payment. The mess was eventually cleared up but the stress of a situation like that is something I never want to experience.
Key Advantages and Disadvantages of using a Debit Card
Even with the somewhat lacking consumer protections for debit card users, there are still many advantages to using them. The biggest advantage is from a budgeting perspective. Debit card users are less likely to spend beyond their means than credit card users. Since the money spent is debited immediately, there is no monthly bill and, more importantly, no interest charged.
Keeping good records is top priority for debit card users so that they do not incur charges for insufficient funds.
A great disadvantage to using a debit card is a vendor’s use of an authorization hold. Vendors can place a hold on the funds in an account for a set amount of money and time. They’re required to disclose this before doing so, but if you’re not paying attention your money could be held up for a significant amount of time. More information about authorization holds and how to avoid them can be found here.
Advantages of using a Credit Card
Credit cards have a number of advantages that are contingent upon you using them with care. If you are dissatisfied with a purchase made with a credit card, you have the leverage of filing a dispute with your bank. Vendors are usually more willing to work with you to settle a dispute if they know you’ll use that leverage.
Credit card use also allows you to “float” your money. Depending on when you make a charge and the card’s billing cycle, you could have as much as a month of float versus the immediate withdrawal of your money when using a debit card.
Many banks offer their credit card customers “perks” such as cash back, discounts, and points to use for travel or merchandise. A credit card Hubs and I use accrues hotel points that we use when we travel. One of the best trips we ever took was a trip to Disney World for a race I was running a few years back. Disney is crazy expensive even on a good day but we stayed 4 nights at one of the non-Disney resort hotels located on the Disney property. The cost? ZERO. We paid a whopping zero dollars for our lodging for that trip. You can’t beat free!
Discipline is Key
In order to take full financial advantage of all the benefits credit card use has to offer, you MUST pay your balance in full each month. Credit card use requires a great deal of discipline, especially if you have high credit limits. Just because the bank finds you worthy of a high credit limit does NOT mean you should spend up to that limit! In my not-so-humble opinion, if you cannot control impulse spending you should do as Dave Ramsey suggests and cut up your credit cards. If you have the discipline to not make a purchase just because you can, credit card use is a good money management tool.
Are you a debit card or a credit card user? What is your reason? Please share in the comments.
Be well and God Bless-until we meet again…