In 2006, my wife and I cut up every credit card we owned. My wife even shed a tear after cutting up her Navy Federal card (it was her first). We had over $8,000 in credit card debt and having the cards was not going to allow us to tackle the debt. Our goal was to get debt free besides our mortgage(s). This is Dave Ramsey step 2.
Over the last 6 years, I can say that I didn’t miss having a credit card one bit. Sure there are all the bonuses for travel and cash back that we were missing out on. But we also reached our debt goal. Zero except for mortgages.
We used our debit card for online purchases and any situation were convenience of a card mattered. This year though debit card liability started worrying me. I wanted to discuss the differences between the two and tell you what conclusion I came to.
Debit Card Pros
- Use of a debit card is not a loan, it is money that you already have
- If Visa or MasterCard, accepted almost anywhere
- No separate account to manage
The biggest advantage in my mind of debit card use is that you are more likely to only spend money that you have. You can overdraw your account, but staying on top of your balance prevents this. This makes paying with a debit card a proactive form of payment. You have to plan for your purchases or know you have the money in impulsive situations.
Debit Card Cons
- In the case of Fraud, your money is gone while you figure it out
- You can overdraw your account and be charged overage fees
- Banks are trying to figure out a way to charge for their use
The major disadvantage of debit card use is that your money is gone almost immediately. This means that if someone steals your card number and charges $2,000 dollars to it right before your mortgage payment goes out, you are out of luck. Your account is going to overdraw and you get charged a mess of fees. The money is gone until you realize the fraudulent charge and it is still gone until the bank decides to reimburse your account. They typically will reimburse on a conditional basis until the investigation completes. This was a scary thought for me and something I really wanted to avoid.
Credit Card Pros
- Accepted everywhere
- Convenient and relatively safe method of payment ($50 dollar fraud liability)
- Separated from your real cash accounts
- Bonus rewards (though I put little emphasis here as they encourage spending)
Use of a credit card comes into play for people who make a ton of purchases online. It’s so easy these days to have a credit card stolen. In almost all cases of credit card fraud your largest liability is $50 dollars. On top of that, most credit card providers these days are very proactive with noticing fraudulent charges. If someone buys gas in Ohio at the same time you just bought a coffee in Virginia, you get emails, texts, and a call from the company asking if the charge in Ohio is legit.
Credit Card Cons
- Credit limit that seems like it is your money
- Reactive form of payment instead of proactive
- Interest charged if not paid off every month
The disadvantage of the credit card is the danger of your limit. Having a credit limit feels as though you already have that $3,000 dollars and it is yours to spend as you see fit. I consider myself fiscally sound; however, as noted above, I was once in debt for more than $8,000. It can happen to the best of us. Not everyone, however most people are not disciplined enough to pay the card off every month and only spend what they can afford. This is why Dave Ramsey has zero tolerance for credit cards. For most people, they are addicting and a major pot hole that keeps showing up in front of your feet.
Weighing liability debit card use vs credit card use, my wife and I decided that the debit card liability was too much for us to tolerate. So we got an Amazon rewards card through Chase. We purchase many items through Amazon and do not travel much, so we felt it was the best match for our lifestyle. We decided together that we would only keep this one card and use it for online purchases and anything that comes up unexpected.
Everyone’s situation is obviously different, so look at your lifestyle and make the best decision for you.
In my next article, I will discuss the first few months of our return to the card (and the struggles with working it into our zero based budgeting). Teaser… it has not been easy. See credit card con above about being a reactive form of payment.