Credit and debit cards can cause a big debate in the financial world. Several financial professionals of personal finance, among them Dave Ramsey, don’t recommend a credit card to anyone. Then we have those that do. Those that tell you to leverage your debt to make more money for you in the long-run.
The truth is that there are a lot of intricacies to credit cards as well as debit cards, and figuring out which one is best for you can be a bit of a hassle. You can have both, but what I’m referring to when I say, “best for you,” is which one you use on a regular basis, how you use it, and whether it would be advisable to even have one or neither of these.
Credit cards, as well as debit cards, have their own pros and cons.
The difference of credit card to debit card is what makes one or the other more beneficial for some than for others. Depending on your level of financial responsibility, one or the other could be an advantage or a disadvantage to you.
Without further ado, let’s get into the difference of credit card to debit card and why you should (or shouldn’t) use them.
To start off we have credit cards. Credit cards became popular because of their efficiency to allow people to purchase things without having money at the moment. Then, being able to pay it back later with accumulating interest.
This allowed money to flow through the economy, even if people did not have funds available at the moment.
Again, this early purchase-power is what gave them their popularity. But ironically, this isn’t the best way to use them.
How Credit Cards Work
Credit cards give you access to a line of credit from a financial institution such as a bank. What is a line of credit? Essentially, it is a preset amount of funds that a cardholder can borrow from the financial institution to either withdraw cash or purchase items.
Expenditures and repayment of debt are reflected in a consumer’s credit report. Consumers are able to raise (or lower) their credit score by having a history of their credit utilization and payments.
The higher your credit score, the lower your risk of default is, and vise versa. The term “default” simply means that you don’t make your payments on time. Higher credit scores allow you to have access to big loans to make major purchases such as a home or car.
The cardholder must agree to pay back the borrowed funds according to the institution’s terms. If the cardholder fails to follow these terms, they will have to pay interest and/or other penalties on the card. Thus, making their original expense more expensive in the long run.
Credit Cards are separated into 4 categories:
- Secured Credit – These require an initial deposit from the cardholder for the institution to hold as collateral. This amount is given as an initial credit line. This means that if you made a deposit of $200, that will be how much you have available to borrow. Usually, this card is for people who don’t have a credit score and are starting out. These people are seen as “high-risk” of not paying back what they borrow from the institution. That is why they must provide the initial deposit. Once they have been consistent with paying back borrowed funds on time for a certain amount of time (usually 8 months), the cardholder will get their initial deposit back and have their credit line extended.
- Standard Cards – These are the simplest cards, all they do is give a line to their users. After the initial deposit has been given back to the cardholder from a secured credit card, and the credit line has been extended, the card becomes a standard card.
- Rewards Cards – These are as simple as their name implies. They are cards that provide you with different rewards and bonuses for using their credit-line responsibly. These rewards can vary from cashback to travel points to more reward variations. Consumers who pay off their balance in full and on time every month can profit from using rewards cards.
- Charge Cards – For these cards, there is no preset credit limit, however, they don’t allow unpaid balances to carry over to the next month. If you don’t pay them back, you can expect to pay late fees, receive increased interest rates and incur damages to your credit score. If you continue to miss payments, your card can be frozen.
Credit cards offer high-quality consumer protection through fraud protection and warranties. They provide additional warranties or insurance above what the retailer offers for its products. For example, if an item becomes defective after the manufacturer’s warranty has expired, the credit card institution might be able to cover the defective item.
Despite these benefits, credit cards are costlier than debit cards. Several credit cards (not all) have annual fees that charge the cardholder for using their credit. They also have over-limit fees, late payment fees, and several other fees in the form of penalties for late payments.
They charge interest on unpaid balances that carry over to the next month. This interest can vary. The lower your credit score the higher your interest rate. The newer you are at using credit cards the higher your interest rate. If you pay off your balance in full, on time, every month, you don’t have to deal with these penalties and interest rates.
Also, if the card gets stolen, and the theft or loss is reported in a timely manner, the maximum liability that might be owed for purchases made is $50. Credit cardholders do not have to be immediately assessed in-depth for the charges being disputed. They usually have these charges restored immediately.
The law is more merciful to credit card holders on zero liability protection than it is to debit cardholders.
Debit cards look the same as credit cards but they are very different. Debit cards make cash withdrawals and purchases by directly deducting money from your checking account.
They don’t charge any interest rates on your money and the only fees they might charge are overdraft fees and certain transaction fees like international purchase fees.
Few and newer cards can offer the convenience of credit cards and many of the same protections when they are issued by Visa or Mastercard.
However, when it comes to a stolen or lost card, debit card theft victims usually don’t get their refund until an investigation has been entirely completed. This delays the refund process and could end up losing the victim more money. Sometimes they aren’t fully refunded for their losses.
They also don’t usually extend the warranty for items past the manufacturer’s warranty. They simply act like cash. You won’t be seeing your money back if your item is defective and past its warranty deadline unless you dispute it with the manufacturer.
Debit cards come in 3 separate ways:
- Standard Debit Cards – These are your usual debit cards. They simply deduct money directly from your checking account.
- Electronic Benefits Transfer (EBT) – These are issued by state and federal agencies.
- Pre-Paid Debit Cards – These give people who don’t have a bank account a way to make electronic purchases with a pre-loaded amount on the card.
People who don’t like to spend very much tend to prefer debit cards because they usually have no fees other than the overdraft fees, and certain transaction fees.
Also, newer debit cards are now providing their own version of rewards.
Institutions like brokers and banks are now giving access to newer debit cards that pay interest on the money you hold with them. Brokers do this by partnering up with banks and ensuring that the banks they partner with are insured by the Federal Deposit Insurance Corporation (FDIC). Essentially, it’s all in the banks and money market accounts to determine if and how much interest you will be given on your money.
Keep a mental note, however, that even if a bank or broker claims to be FDIC insured, it is a good idea to verify it on the FDIC website. This is because banks and other financial institutions are never really free from the possibility of lying about FDIC insurance.
Your Financial Behavior
If you want to know whether you should get a debit card, a credit card, both, or neither. You should strongly evaluate your personal financial behavior.
Debit cards eliminate the danger of racking up debt because they can be used by the holder to avoid the temptation to overspend with a credit card.
If you are someone who spends uncontrollably and is easily tempted to spend more than you have, you should most definitely not get a credit card or get rid of it if you do. If you are someone who does not manage your finances well, tend to overspend, and end up going negative on funds, you probably shouldn’t have a debit card either!
Self-control is the key. Some studies suggest that people who use plastic to make a purchase end up spending 22% more at a grocery store than people who use cash. This is because cash tends to have an emotional hit on a person’s conscience when they see those Benjamins walking away from them.
Whereas, if they pay with plastic, they’ll get that plastic card right back into their hand after the transaction has been processed. They don’t even think about the money they spend because they never physically saw it leave.
However, this behavior does not apply to all people. Although they are in the minority, there are definitely people who have a lot of self-control and manage their finances well to the point that losing money on a card causes the same feeling as losing cash. I know this because I am one of those people, but I am very well aware that this is not a very common behavior.
It most certainly does exist though. Ultimately, your personal responsibly plays a major role on whether you should get a credit card, a debit card, or neither.
Dave Ramsey on Credit Cards
For those who do know Dave Ramsey, you are probably well aware of his opinions on credit cards. Dave Ramsey is strongly against credit cards and does not suggest them to even the most financially responsible people. He makes this judgment from the statistics of the majority.
Such statistics prove that the majority of people will end up spending more because they will be induced by the temptation of having extra funds available. They also show that people will spend more because they will be chasing bonuses, cashback, travel points, and other rewards.
The truth is that Dave Ramsey is right. Most people shouldn’t have a credit card and most people will end up spending more because of rewards and temptations.
But what I, and several other people, disagree with Dave on is that nobody should have a credit card. I definitely believe that there are people who are able to responsibly manage their money to where they use their credit responsibly and only on expenses they would have made anyway.
This takes me to my next point…
Should You Get a Credit Card, a Debit Card, or Neither?
Here’s the thing, if you’re debating on whether you want to get a credit card. First, think about how financially responsible you are.
Here are some things to look at:
- Do you track your funds?
- Do you live and spend below your means?
- Are you able to save money without a problem?
- Do you spend based on wants or needs?
If the answer to the first three questions is “no” and your answer to the fourth question is “both” or “wants”, I would not recommend getting a credit card.
The reason credit card companies are able to make so much money and give out very nice rewards to responsible credit users is because they are able to make money from irresponsible credit users.
Total U.S. consumer debt is at about $13.86 trillion according to debt.org. This is because the majority of people are irresponsible credit users. This is how credit card companies make so much money.
But for those of you who have a strict budget, who keep track of all your expenses to the cent, who save with a purpose & invest, and who have the self-discipline to only spend what you have on what you need, I could definitely agree that you should take advantage of credit cards and debit cards.
When it comes to debit cards, if you are someone who does not manage your finances well, tend to overspend, and end up going negative on funds, you probably shouldn’t have a debit card and most definitely not a credit card.
If you are part of the group who spends 22% more when using plastic than when using paper cash, you should also avoid plastic overall. For someone like me, I personally don’t like paper cash because I’ll lose the change or want to get rid of it. That change can really add up in the long run.
If you’re going to get a credit card or a debit card, make sure you spend with them as if they were cash and only on expenses you would have made anyway.
Don’t overspend on either, don’t spend more for the sake of credit card rewards. Maintain a financial discipline and you’ll be able to reap the rewards of both.