I’m still trying to figure out why people think I’m foolish for using a credit card instead of a debit card. I’m a Dave Ramsey listener and fan so I’ve heard him rant and rave over the credit card — burn it, torch it, drown it, just be sure to kill it (if you’re not familiar with Dave Ramsey here is an introduction). Seriously though, don’t you think the whole no credit card intolerance has gone a little too far? When you take off your thinking cap the results can be dangerous.
Photo by MVI via Flickr
I imagine the following discussion.
Setting: A nosy neighbor comes into my home and sees my circular saw and says:
Nosy Neighbor: “Hey Craig, you need to stop using that saw because if you ever took the blade cover off it would slice off your finger.”
Me: “But I never take the blade cover off.”
Nosy Neighbor: “I’m just saying if you did take it off, it would be dangerous.”
Me: “I don’t take it off.”
Many of the conversations I have had about credit cards and debit cards have sounded much like the conversation above — except we talked about the two forms of plastic. The concerned citizen says my credit card is a danger to my family, my future, and my finances. I say my track record has proven otherwise. And around and around we go in circles. It is almost as if people are unwilling to have a rational discussion about the advantages of credit cards.
If the discussion was about plastic versus cash, then you have some valuable arguments in favor of cash being cheaper. However, because plastic is more convenient people start to make a big deal about how you should use a debit card and not a credit card. If the discussion were about poor money managers who did not use credit wisely, then my view would be different. But for people who manage their purchases and pay off their bills each month, I think carrying a credit card is fine. And to be on the safe side, our family has established some credit card guidelines that protect us from improperly using the cards.
Let’s say you are filling up with gas at the local gas station. Do you think that you would spend a different amount if you used the debit card? I seriously don’t think you would.
With a credit card I only have one major accounting task — to pay the bill at the end of the month (plus to review my statement). But, with a debit card I need to be sure there is cash in the account and to be sure when checks clear they do not conflict with my debit card purchases. If I make a mistake with my calculations I will get hit with a $29.00 bank overdraft fee. Personally, I know I’m more likely to overdraft than I am to miss an automatic credit card payment.
Let’s return to the discussion about filling up with gasoline. If I put $50 in the tank with a debit card I get zero bonuses. With the credit card I can get a few percent cash back (or comparable points) with most cards. Essentially, I get something for doing nothing. Take a look at the best credit cards.
A couple of years ago I went to rent a car with a debit card. I learned that if I used my debit card I was required to pay the extra insurance at $12.95 per day. I chose instead to use my credit card so I would avoid the $12.95 fee.
I do not know my FICO score, though a banker once told me, “Man, you have a good score”. While I try not to care about FICO I know some companies do care about the score. Your FICO score impacts car insurance rates and home mortgages, so I’d like to have a better score. If carrying a credit card instead of debit card helps improve my FICO score, then I will carry a credit card.
Next time you encounter a real life credit card user, don’t automatically dismiss them as having a lower IQ. There are legitimate reasons to choose to use credit over debit. With that said, if you are a credit card user and you habitually do not pay your full monthly balance, then there are probably about 1,000 reasons why you should cut up the credit card. If you are a responsible credit card user, I don’t think you should be bullied into ditching the card. I definitely don’t think there is a valid reason to switch from a credit card to a debit card.
“1. People do not spend differently using debit or credit forms of plastic.”
Do you have anything to back that up? I know I spend differently using a debit card because I pay much closer attention to balances so I don’t go over.
“But, with a debit card I need to be sure there is cash in the account and to be sure when checks clear they do not conflict with my debit card purchases. If I make a mistake with my calculations I will get hit with a $29.00 bank overdraft fee.”
Having separate accounts for bills and general spending can help if you’re paying a lot of bills with checks that might not clear immediately. Also, I keep enough in my main checking account as a buffer to cover my largest bill and then some, so I’ve NEVER had an overdraft EVER. Also, some banks let you set it up so that your debit card is just declined instead of over-drafting. But of course, watching your accounts and making note of checks is just good common sense. I’d rather do that then spend more than I have anyhow.
“3. Credit cards offer bonus cash back or points rewards.”
Have at ‘em. Maybe you spend a lot more than I do, but I never got a lot of rewards — definitely not worth dealing with the scumbag credit card companies who can and do change terms as they please.
“4. Credit cards are more versatile with added features.”
Depends on the company.
“5. Credit cards build your credit.”
Already got a mortgage, but if I didn’t I’d rather save up the old fashion way. I really doubt my car insurance would be affected much if if I used credit cards. Of course, it would go up if I ruined my credit by not paying my credit card bills — which I have no plan to do. I’m reminded of a case, though, mentioned on Dave Ramsey where a couple trying to buy a house found out that their credit was hurt because of a VERY small sum on a store credit card that had gone unpaid because they were simply unaware of it. Oops! No risk of that with my debit card.
Anyhow, play with snakes if you want but I’m done with the hassle of credit cards.
@Meg
Thanks for your comment I’ll do my best to address your concerns.
#1 – I should have written “I don’t spend more”. I have studied my own spending, but honestly have not looked into any outside studies. I do think it is true that psychologically plastic is plastic. Anyone else have any thoughts on this?
#3 – I don’t actually think I do spend more with credit plastic than I do with debit plastic. For that reason my theory is that if I use plastic I might as well get rewards. If they do change the terms and I don’t like it – I just cancel the card. I am the customer and I have cancelled cards that implemented policies I disagree with.
#4 – In terms of cc versatility, I have only bought something once (Dave Ramsey site) that accepted debit and not credit. But, I have been many places (overseas) that accepted credit cards not debit cards. Hence, they are more versitile. I would be interested to know what debit cards have more features than the typical credit card.
#5 – Like I said in the post, I don’t even know my credit score. I don’t really care about my credit score, but if sliding a credit card for a payement instead of a debit card for a payment builds my credit, then I’ll do the thing that helps my credit. In the future there might be other things where people look to your credit score.
Regarding your ‘playing with a snake’ comment.
First, this post is not supposed to convince anyone to use credit cards (I rarely do).
Second, this post is not arguing that credit cards are better than cash (I think cash is best).
Third, I rarely use credit cards. When I do I pay my large reoccuring bills, work related payments, and travel expenses overseas. I do not use it for day to day shopping purchases (I use cash). In fact, when I use my credit card overseas (0% foreign exchange rate) I save 1-2% overseas compared to my debit card. Still, people say I SHOULD use a debit card – I’m honestly not sure why. What is the difference?
In all humility I want to know – what is the danger of using credit cards (instead of debit cards) for a person with good credit, good accounting, and disicpline? How, after 12 years without a single credit card fee does my using credit cards parallel playing with snakes? I want do want to have a healthy financial plan. Please help me see the light.
Is there ever a case where someone could say – I hate credit cards, but in your case it really doesn’t matters if you use credit or debit.
Its not one or the other, but when to use both. My checking account pays 4% APY, and it requires using the debit card 10 times per month. Which I do for small items, gas,supermarket etc. Last week I bought a new mattress,box spring set and I used my rewards credit card to pay $1200. It gives me added protection if something went wrong, and cash back is nice.
One of the most irritating things I see when reading a lot of debt blogs is the irrational hatred of credit cards. You can’t talk them down from their moral high ground so I don’t bother.
I am not in debt because of credit cards. In fact, it wasn’t until I really focused on getting rid of my debt that I first swiped my credit card. I got my first card in college and I figured out that it was over 100 months before I charged my first item. It wasn’t on that card. They canceled it about 6 months before But I had a different card.
I am in debt because of student loans, a car payment (that was pretty dumb), and my mortgage. I call the car payment dumb because I was raised to by a mother who taught me to never have a car payment. Until that point, every car I owned was a beater that I paid cash for. But I had a new job and wanted a nicer car for once. I still bought a used car and got a decent deal on it. But if I had bought another beater and saved the money, I would have been better off. The mortgage is bad because I got a loan that would never go through in today’s market. I got an 80/20 mortgage with no money down. I bought a foreclosed home so the deal wasn’t too bad. Still, thanks to a constantly declining housing market, I am upside down in that house. I’m not moving so it’s not going to hurt me. One of my financial goals is to pay off that 20% mortgage and get some equity in the house.
I started to use the credit card for many of the reasons you mentioned. I was already using my debit card for everything. I rarely used cash — it flows like water through my fingers. I had a strict budget in place for expenses and knew how to stick to it while paying with a card. And I knew I could and would pay off the entire balance each month. I don’t even use the grace period all that much. As soon as the previous month closes, I send the full payment. By the time the paper bill arrives in the mail, the account is already paid off. So there’s no worry about being hit with a late fee. And my online bill pay is electronic so there’s no money getting lost either.
I’ve seen a different rental car issue before. My GF (who doesn’t use credit cards) was going to use her debit card but they were going to put a $300 deposit/hold on the card that wouldn’t be there with a credit card. So we switched and put it on mine. The $300 hold would have taken the rest of the money she had budgeted for that specific trip… and made renting the car pointless when she didn’t have the money in the account for the gas and hotel she planned on staying at.
So far, my credit card has given me some extra money to pay towards the debts. I have stayed within my set budget and even under budget in some areas. I also find it easier to budget each month with my checking account balances. Since as the gas and food expenses come out at one time instead of ‘randomly’ during the month.
All good theoretical points but you are allowing the exception to define the rule. Let me suggest this: Do a study of personal bankruptcies and/or foreclosures. Compare the number of credit card users to debit card-only users. Then write this article again.
Oh – and that rewards card thing? Nothing but a ploy to encourage more unnecessary card spending. And it works.
I don’t think you’re foolish, but my wife and I don’t use credit cards for two reasons:
First, and this is a minor issue, I don’t like the idea of having a large bill (2 or 3 grand) do at one time of the month, we don’t have a mortgage anymore, so I enjoy the fact that our expenditures are spread out over 30 days.
Second, I really do believe that credit cards, overall, have a significant negative effect on our society. I realize that many people use them with no problem and even get some benefits and I was no different for years. But millions of people also end up getting hurt by their debt, and so as a matter of principle, I choose to not use their product. I don’t visit casinos for the same reason.
@pharmboy
I appreciate that you are confident of your position and not judgemental of those who disagree.
So would you say you contientiously object to credit cards based on their negative impact on others? I think this is one of the strongest reasons not to be a credit card user.
@Kevin
I wonder why there is such an irrational hatred of credit cards.
I do think that the biggest difference between the credit card and the debit card is apparent when you are renting a car.
@ Mr. ToughMoneyLove
While I agree that we should not allow exceptions to define the rule, I would disagree that these points are ‘theoretical’.
Ultimately, the question is what is the point of this post – to say that credit cards are awsome? No – I don’t believe that.
To say that everyone in the world must use credit cards? Nope, I don’t beleive that.
The point is simple – for some people and some situations credit cards make more make sense than debit cards- even a lot more sense. Those people they should not be belittled because of their choice to use credit.
Regarding rewards – I agree completely. They are a marketing ploy. Yes, they do encourage people to spend more money. But, when I know I’m going to buy something with plastic I don’t have a problem getting the rewards.
@ RussJay
OK. I’ll accept the both option. A checking account at 4% is certainly the exception these days. Of course, if using your debit card 10 times allows you to get that rate – good for you. The debit cards are trying to compete for their share of the plastic market.
Craig – Not even curious to know your FICO score? You get a free report once a year I believe, and knowing is half the battle! Then again, it’s overrated if you don’t plan on taking on lots of debt.
CC’s are fine. Sometimes thought, you don’t let kids play with guns.
FS
I don’t like the idea of having a large bill (2 or 3 grand) do at one time of the month, we don’t have a mortgage anymore, so I enjoy the fact that our expenditures are spread out over 30 days………….
@Financial Samuria – I guess I am curious to know my FICO score, just not curious enough to do anything about it. Typically, to get your credit score you actually have to pay. I don’t think the report includes a score. Can anyone confirm that?
@Sam – nothing wrong with spreading out your expenses over 30 days. It actually sounds like a good plan to me.
It’s not guns, that kill, it’s people that kill. It’s not credit cards that drive people into debt, it’s people who drive themselves into debt
After I paid off all my credit cards. I decided to use just one and hide the rest for safe keeping (in case of a big big big emergency).
I treat my card like a check book. I keep track of my current cash balance in the bank with an excel worksheet. When I use the credit card, I update the worksheet at the end of the day, debiting the bank balance and crediting the credit card column. At the end of the billing cycle, I have the cash to pay the credit card in full. The bonus I get for doing this is the cash back points. I get $50 for every 5000. I average about $500 a month on the card so I get at least $50 back every 10 months.
Now, it takes a lot of discipline to make sure you don’t “overdraw” and it may not be for everyone. It has worked for me for the past 3 years now.
On another note, recently we’ve received a couple of letters from the credit card companies, whose cards we’ve put away, saying that they were reducing our credit limits due to inactivity.
@Craig: You can get a free credit score, based on TransUnion, from CreditKarma.com. It gives you a nice idea of where you are at, even though it won’t do in terms of what lenders actually use.
Craig, this is by far my favorite post out of everything that I have read today just because of your great “Nosy Neighbor” analogy!
@ Miranda – thanks for the helpful information.
That’s exactly right! I don’t use credit cards because of their negative impact on society. I don’t believe they should be overly regulated to “protect” consumers, but as a society we should freely choose not to use them, because of the harm they cause especially with the casual, ubiquitous role they have settled into in our society.
My first child is 2 weeks away from being born, and if he or anyone else even partially rationalized their use of a credit card (for a big screen TV of course!) because this thought entered their mind: “well so and so uses credit cards and he is good with his money”, it would really bother me.
Whether I’m paying cash or using the CC, I agonize over any spending that is outside my budget. I keep track of my spending on a spreadsheet and can tell with just a glance how I’m doing for the month.
I would like to share my experience with CC in response to this email. And I believe I can help answer the question of why so many are such avid opposers of CC, even when seemingly used rationally.
I have never once paid one penny of interest on a CC. I was raised to use them for their benefits, but to pay them off each month. And that was what I did throughout my college years and into my first several years of marriage. I have never had any CC debt. Until one day I read Dave Ramseys Total Money Makeover. As a christian I became aware of my incorrect use of debt. I had always thought, I’m good financially because I don’t have any CC debt, never mind the 35k in cars and student loans. So we decided to implement Daves plan, the whole plan and nothing but the plan. We had wonderful success and paid off all 35k in 9 months. We were debt free but our home. I had not used my CC, but it was still in my wallet. A security blanket of sorts.
In celebration of our progress I decided that we could make a celebratory purchase. We almost had our 3-6 months emergency fund in place, and we could afford it. So $3000 dollars later, we had a beautiful new TV cabinet and 52″ flat screen television (along with a more expensive cable bill for HD channels). The only problem was I had not saved up the cash. I put it on that CC because I knew I could afford it. And it took up every extra penny over the two months that it hit our bill to pay it all off.
Did I spend more than I would have with cash? No. But it was the patience and timing that was lost because of the CC. I had not followed the plan. And the CC in my wallet created the opportunity for me to abandon the plan. So I cut it up.
I’m good with money, but I’m also a good rationalizer. Removing the possibility of purchasing before I had saved the cash is the reason I don’t have a CC.
And I think we are so opposed to them because we have seen the hurt they cause many people. Just like Pharmboy, they target people who will make them money.
Arguing the use of credit vs. debit is a popular topic these days.
I see the same void in this article that I see in nearly all articles of this nature – using a product (a CC is a money making product) from an industry that seeks to exploit the poor for gain. Before teeth gnash, I’m not saying CC users are exploiting the poor… but the industry itself. And if I have to convince of this fact, woe to us.
Most people are unaware of this argument, so they are not accountable. But for those who know the credit industry preys upon the weak and disadvantaged… for them it is an entirely different responsibility.
Cheers!
Did you know that you contradicted yourself in Reasons 1 and 2?
#1) You spend the same regardless if using a debit or credit card
#2) You check and double check your bank balance to be sure you have the necessary funds for a transaction.
So, judging by your article, you actually think about your spending when using your debit cards. Hence, Mr. ToughMoneyLove is on to something, the rewards are just a ploy to get card users to spend more money.
Also, just owning a credit card boost your FICO. No need to use it.
@ Jim. Thanks so much for your comment. #2 I’m not saying that I double check my bank balance when using a debit card – I don’t use my debit card. In order to sucessfully use a debit card I would need be a knowledgeable money manager. If a person is bad at accounting and overspends with a credit card I don’t think using a debit card will make them any more responsible. If they don’t get their act together debit cards are also quite costly.
In my response to Mr. ToughMoneyLove I did agree that rewards are a ploy. We might use another phrase – a marketing strategy. Imagine I’m going to open a bank account. One offers a $50 sign up bonus and the other $0. Would I really be better to open the account with no bonus just becuase the other is a ploy to get me to open their account? I don’t think so.
Finally, I completely agree about your statement regarding the FICO score. I am a very, very limited credit card user. I use cash for 95% of my purchases. I mentioned in an earlier comment that I only use if for three types of purchases. Over the last two months I have make less than 5 credit card purchases.
Again, I simply cannot see that using a debit card for those five purchases will drastically change my financial plan.
@Matt. I knew you would hate this post – sorry you chose to endure it
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Remember, this post is not about promoting cc’s. It is about comparing a cc and a debit card.
If I’m going to use one of two forms of plastic – why not get cashback. This might not be a primary or even significant factor, but it is a factor nonetheless.
I do beleive the most convincing argument for not to use a cc is the moral argument. But, I’m still not completely convinced (not to say that one day I won’t be …).
I have rare occassions (two times a year) where I spend around $10,000 in business expenses in a month. The cc allows me to charge those espenses and get reimbursed later. For me it is irresponsible to use all of my emergency fund (intended for my family) to cover business expenses.
I don’t think that my owning a cc in any ways means I am irresponsible towards my neighbor. I does, however, mean that cc do provide legitimate services for some people.
@Mike.
Thanks for your feedback. I have no problem with people avidly opposing cc’s. Honestly, I don’t promote cc usage (read through my comments here). What I do oppose is a thoughtless opposition where a person’s ideas MUST apply to everyone else.
There does seem to be a trend in these comments to attack the cc. That is fine. I’m not a cc fan.
To focus on the essence of this post – what would have happened if you used a debit card to buy a $3000 TV (and you didn’t have the money) instead of a cc? The first thing is that you would get hit with a ton of fees. You would probably have your bank account closed. You would have trouble opening a bank account for a long time. You would probably get sued. The problem is not that you used a cc instead of debit, but that you bought something with plastic that you could not afford. Let me know if I’m wrong. This post compares two forms of plastic. Do you think you would be better off today if you used a debit card that day instead of a cc to buy the TV?
I have trouble with the concept of separating the morality from the situation. I would argue the morality as a paramount issue.
Per EF, personal EF should never be mixed with business costs, rather always remain independent of each other. If the money is not there for the business expense, should the purchase be made at all?
Buy using a credit card wisely you have the ability to build your credit which in turn increases your FICO score as you mentioned. This is an opportunity to show that you as a credit card holder are capable of being responsible with discipline, spending within limitations and paying your bills on time. Without this it simply removes one simple way of building up credit.
The FICO score which is made up of your credit scores is something that is earned based on proof through responsible action. That is not an evil thing at all. It is an opportunity to use something for your benefit and the results will be based ultimately on the card holder’s actions.
Another bonus that comes with using a credit card is that credit card companies provide insurance that a debit card does not provide. So if there are fraudulent charges, you are better protected if you used a credit card.
I’d add one more:
Dave Ramsey likes to point out that (contrary to what many believe) you CAN rent a car with a debit card.
BUT – and here’s a big problem – you need to have a fairly large checking balance to rent a car with a debit card, because the rental company places a hold on a big chunk of money. With a debit card, if your current balance isn’t that big, you can’t rent a car with a debit card.
@Kristen – I have heard differing facts about the protection differences between credit and debit cards. My debit card paperwork says it offers zero liability protection and fraud monitoring (just like the credit card). As far as I understand both offer the same protection, but a debit card might take more time to get fradulent funds returned to your account. Anyone know the scoop? Either way it would be a credit card advantage.
@Terry – You are exactly right that you can rent a car with a debit card (thought you need to ask in advance as not all companies will allow it). As I shared in my post, some do not dislose that they have additional require insurance fees for debt card users.
@Matt – I agree morality is a paramount issue. Thanks for clearly sharing your position.
Craig – What are your thoughts about some publishers who advertise cards to college students and such? Do you think that’s right?
I gave up the debit card a few years ago when I was dinged a $35 fee for the miscalculation of a penny! Yes, I accept that it was my fault. I could give a number of excuses as a single/divorced mom of 3 with way too much on her plate. Yet, it was indeed my error. I went to the cash envelope system and (gulp) yes credit cards. I now have paid them off and use the credit cards for insurance and to increase my scores since I BK’d after my divorce 5 years ago. I do not believe that the spending is the same for debit cards as it is for credit cards though. Spending a debit card is just like spending cash whereas we all know there is some leeway with the cc.
@financialsamurai – Great question. Now if I could only figure out if I’m walking into a trap …
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My first reaction – not if it is preditorial.
My second reaction – how does one know when something crosses the ‘preditorial’ line?
My third reaction – a lot of advertisers focus on teens and college students. Do college students just have more money than sense?
My fourth reaction – I really don’t know exactly what cc companies are doing on campuses so I’d better plead the fifth.
BTW, I am not trying to be as unhelpful as possible, but this is a complex issue.
if the customer already has a credit card y does he need a debit card?
As to the morality claim, maybe you would feel better contemplating that owning, using, and paying off a credit card every month actually costs the credit card companies a lot of money because they aren’t getting the interest payments or other fees or charges, and have to make due only on the small fees they can charge the businesses to use the cards.
To some people it would feel like, “sticking it to the man”.
With Discover in particular it is very easy to realize $100 to $150 a year just by paying regular recurring payments with the card. You can also donate that money straight to charity from the website if you don’t want to dirty yourself with it.
Your points comparison
Point 1:
For me, I there is a difference, but it’s not in so much as do I have the funds or not, but what are the risks I’m taking on.
Point 2:
Personal Accounting Errors are a possibility, but that’s also why I keep a specific amount in the checking account along with the other fact, there could be a small subsequent cost of something that came up, so instead of getting hit with a transfer fee, I just keep a small amount extra in there as a safety net. Therefore, this accounting error shouldn’t be an issue.
Point 3:
I also use my main credit card for this same purpose along with the fact I can delay the demand of the cash flow out to a later date, which has allowed me to pay down debt that much sooner, which then in turn has allowed me to save as much as $1,500.00 per year in the form of interest charges that I would not have saved, had I not used the credit card. Therefore, my real savings by using the credit card is more like in the area of about $1,900.00 per year.
Point 4:
This is true in many respects.
Point 5:
This is true as well, but this is not a concern of mine.
Now onto another point that was only brought up in the comments:
Security against fraudulent actions:
I have had it happen to me with both a credit card of mine and a debit card of mine, and trust me, the differences are as different as day and night.
Fraud against credit card:
You still have to report it to the rep. Rep gives you a hard time cause of so many people may call in about such claims and don’t remember they actually made such transactions. You have to find something to convince them that it wasn’t you. They will then submit to you an affidavit to you and you will be required to fill this out as this can be helped against you if you commit purgery on it. Yes, not pleasant, but this is where the bad ends as I will do the affidavit thing just as I did with the situation I had with my CC. As a matter of fact, it didn’t even interfere with my purchases other than for the fact I had a few days of delay to get a new account number and card, which meant I still had to change my automatic setups with other places. I also only had to pay into the CC company what would have been my “New Balance” amount if those fraud charges weren’t on it. After that, everything cleared up.
How much time did this take to clear up: Initial contact, 2 or 3 hours including the Affidavit form filled out and signed. As for the charges being completely removed, within 3 weeks, but had no real impact on me with a high enough credit card limit on it, I was able to continue with my CC purchases once I got the new card.
Now onto the issue I had with the DC with the same situation. This one I absolutely hated and it was a total nightmare. Dave Ramsey and a bunch of others claim you have the same protection as you do with the CC, far from it. You have jack squat for protection with the DC.
I called up the bank, and they told me they couldn’t do anything about it. They weren’t even going to remove the transaction fees I incurred as a result of the fraud charges.
I was forced to call up every single merchant being at their mercy to have them refund the money back into my bank account.
My checks were bounced, so I also had to call up them vendors and explain the situation to wave their fees against me.
Once all of these things were cleared up with the merchants, I then had to call up the bank and convince them that I would not have incurred the fees by having them go through the transactions by hand showing all of the money had been refunded back to me.
You know, to deal with this mess, it took at least a good 2 weeks if not more like 3 weeks to get this whole matter cleared up.
As far as financial security is concerned, I will never use a DC again unless I have no realistic choice cause of this very issue I had with the DC usage.
Therefore, point 6: CC usage doesn’t allow for fraud charges to impact checking account negatively directly as it’s only on the CC, not on the checking account where checks are dependent on that money being in there. DC usage on the other hand put your checking account at potential risk of your payments to vendors via the checking account being bounced.
BTW, just for the record, as for my spending on the CC, I use the CC for those items that was already planned for anyhow. I also have used it for financial emergency spending, but only if the emergency fund can cover it, which I been pretty good in that area too.
While the cash back ploy may have caused me to do a little extra spending in rare cases, but it hasn’t been to the point that it even comes close to what I get back from the credit card company.
As far as people saying they are sticking it to the CC vendor, no they aren’t. These vendors are still getting their money from the merchants via transaction fees. Have I paid interest or any other finance charge to the CCs? No, I have not as I pay off in full every single month.
What is the key to doing all of these things?
First, you must create a realistic budget taking into account your set of circumstances and your household’s set of human behaviors.
Second, you must convert this budget to the cash flow management on a daily basis with no single day over the next rolling one year going below that specified amount (obviously not lower than 0 else you have a negative balance and that’s not good).
Third, you must be self disciplined to stick to this budget. If you need to make adjustments to it, then you go back to step 1 and work you way back down here.
Fourth, you must pay the full balance off in full every single month by the due date
Fifth, keep tabs with your usage and record such transactions into your spreadsheet, so as you can keep track of where you stand financially and with your cash flow management worksheet.
Sixth, by checking your account online, you also are to be sure there aren’t any fraudulent charges taking place and if there are, you are to report it and get things dealt with right then and there.
Seventh, SCHEDULE your payment in advance so as the CC Vendor get the payment by the due date. I highly recommend doing this online (rather if it be with the vendor if they don’t charge a transaction charge for this as most don’t, but a few like Huntington Bank do, it be via your own bank with their online banking, though this means you will be out of the money up to a few days earlier than if it was with the CC vendor, but so be it, the idea is to avoid the fees while taking the most advantage of it without having to think about this financial stuff on a daily basis). By doing this online instead of via the snail mail, this prevents the CC vendor from playing the late game as I hate that game. The snail mail route gives them the chance to claim you were late and you end up paying those extra charges.
Eighth, Schedule your transfer to go from where you keep most of you cash at (I.e. where do you have your pay check or retirement distribution go to by default if done via direct deposit) to be in there by the date the money has to be in the checking account to pay for the CC.
One thing I didn’t mention in this 8 step process as should already have been accounted for is to make sure this is reported in your cash flow management worksheet. The reason for that, you shouldn’t have made such purchases if it wasn’t already accounted for in your cash flow management worksheet PRIOR to the purchases.
@Ronald – Thank you for this great comment.
The way I see it, you either have the cash or you don’t. I personally think that you would spend differently using a debit card because it is real money. A credit card is spending money you don’t have. You are getting the goods at the point of sale, but are not paying the company for them. A debit card, however, is spending real money you do have, right there, in your account, available immediately. You receive the goods, and the company is paid for those goods straightaway. It’s how business used to be done. Insane the way it’s done now – makes no sense to me. It’s like companies want to be insolvent ‘Sure, take all our assets, our stock. We don’t mind if you get ill or lose your job and cannot pay us next month. We like having our resources drained!’ My business has no debt, and we don’t want any. We like to stay solvent
You say yourself that you have to watch the balance more with a debit card, to avoid going overdrawn and getting charged. So what you’re saying is that debit cards are higher financial maintenance than a credit card, which only requires you to pay a bill each month. This leads to the logical conclusion that the carrier of the debit card must be better at managing their personal finances than the credit card carrier, out of necessity, despite popular belief! Sounds to me that, by your own admission, if you had a debit card, with all those potential bank charges and chequing problems, your finances would be a mess! Ironic isn’t it that society seems to value non existent money over money upfront. That someone who does not have the ready cash is valued more and given higher social status, than someone who is able to afford what they’re buying when they buy it. Crazy world we’re living in my friend, crazy world….
I can’t speak for the author and its finances, but he does have some points, though some of that is changing. However, I would have added one more major point to the 5 point he made, and that is a debit card is NOT nearly as secured as a credit card against fraud, thus that is my biggest reason why I use the credit card over the debit card.
So let’s go over his 5 points, then go over my 1 added point.
Point 1:
I suspect is true other than people are more or less forced to spend only when they have money in the bank (At least prior to the recent law changes, which now would be more like have enough money in the account to cover, unless they actually opted into the so called overdraft protection, which the bank use to automatically do and the consumer use to have to manually opt out of such thing, but now the law mandates the bank must have a record of the consumer actually opting into that so called overdraft protection).
Point 2:
This is still largely true, expect now you have to actually have money in the bank under the default rule else you can’t get it. In the past, the bank would simply allow you to make the purchase, but then charge you that overdraft fee, even if you didn’t have enough money in the account to cover it. That’s one of the major ways how banks made money off of people’s poor record keeping of their finances. At least with a credit card in that sense, it wasn’t so much a per transaction fee provided the credit limit was high enough and the person would still pay off the new balance amount by the due date every single month. Even today, still have to watch it, but now it’s mainly only with regards to outstanding payments such as those made by checks.
Point 3:
This was true for a long time, but it is now starting to even out with banks doing it with debit cards in attempt to draw in more customers these days. I however won’t use a debit card because of the security issues, which I will get to later on in this post.
Point 4:
As far as I can tell, this is still true regardless what Dave Ramsey says. He claims you can use a debit card at car rentals, which when I had attempted years ago prior to the debit card fraud issue I had to deal with, I could not do a such transaction. Other places now days will accept the debit card, but they will charge you a fee which they won’t otherwise charge if you use a credit card. Reason being, with a debit card, the seller knows there’s a pretty good bet there’s a very low balance in the bank account, and it would not be able to get much from the customer should something happen to the vehicle, vs with a credit card, the seller knows there’s a pretty good bet there’s a much higher credit margin (Credit limit less the amount of that credit limit already in use by the customer) to be able to get from the customer should something happen to the vehicle.
Point 5:
If used properly, a credit card can build your credit score vs a debit card will never do that. But if you don’t use the credit card properly or you don’t ever use it, you won’t build up that credit score.
My added point, Point 6: Debit card don’t offer you the same protection against fraud as a credit card does.
Again, Dave Ramsey claims you have just the same protection with debit cards as you do with credit cards, but my 1 experience with fraud committed against my debit card vs my 1 experience with fraud committed against my credit card says otherwise.
Experience with fraud against the debit card:
I still had the card itself. The person committing the fraud somehow memorized all of the information on the card and used it over the internet (I have had my suspicions on who it may have been and when that happened, but there was no way I could prove it myself, so all I could do was to report it). Even with the suspicion I had, it was a person who I didn’t personally know, but rather it seemed as though it was a cashier to me. While a very good majority of people don’t have strong memory skills like that, there are a select few people who do possess such skills. I myself also have a very good memory skill as a result of the LD forcing me to learn the art of memorization in order for me to overcome the LD issue primarily in Language. I also had to use my gifted skill of thinking logically to overcome the LD as it could have only been done by using both skills combined.
Anyhow, after me seeing those bogus charges on my bank account online, I immediately called up the bank and told them about it. While they did cancel out the card, they refused to refund me any of that money and they refused to refund me any of the fees that took place as a result of the checks I made out hit the account after those bogus charges had hit and caused my checks to bounce, which the bank charged me some fees and my vendors had charged me NSF fees. I was basically left out to my own to call up every one of those vendors whom the fraudster had defrauded and I was at the mercy of those merchants to refund that money back to my bank account. I was also at the mercy of my own vendors to refund those NSF fees back to me explaining what happened to them. After all of that was done, I then had to deal with the bank themselves and point out the mathematics of it all that I would NOT have been charged any of those NSF fees had that situation not happened, which then the bank finally gave in and refunded all of those fees back to me. This is not something I take lightly as it took me 3 weeks to get this matter cleared up.
Never again will I use a debit card with an account that my check payments to vendors are dependent on as this situation reveals the large security gapping hole using a debit card otherwise have left exposed with no real protection in place to compensate for this security issue.
Experience with fraud against the credit card:
Similar type situation as I still had the card on me as with the debit card, but only happened during the time I was on vacation. Like before, after I got back, I checked online to see how things were. It was at that time I noticed, and I also called up the bank about those charges. They at first gave me some hassle about it. However, when I mentioned about there being international charges on the card and I was still within the US and I could have gotten those services/products within the US should I have wanted to for reasonably good prices, then why would I have done it internationally? It was only at that point when the rep realized the seriousness of the issue and basically said I had to fill out an affidavit, which would be used against me if I was to commit perjury on it. I said, that would be fine as I have no problem with that as I understand what it means. The rep faxed it over to me, I filled it out, signed it, and faxed it back. While the matter wasn’t cleared up right away, at least I was able to keep going for the most part. The only thing, I had to wait for the new card to be mailed to me, but at least that only took a week and it didn’t result in me having to do all of the leg work and hassles. Not only that, but given these charges were on the credit card, it had no impact with my check payments to my vendors unlike what happened with the debit card fraud situation.
As such, the major weaknesses that I don’t like with checking accounts, but it seems there’s not much we can do about those weaknesses:
1: The very low protection against fraud with debit cards, which makes payments to vendors from that same checking account very vulnerable of NOT getting paid on-time should a such fraud take place
2: There is no protection what so ever against any company making a draft check against your checking account once they have your account number and routing number as they can even get that from your check. That has actually happened against us as well as Wells Fargo was the company that committed the fraud against me laying the claim my wife had authorized it, and she didn’t. That’s the biggest reason why now she and I have separate checking accounts so as no company can as easily commit a such fraud against us by using the name of one spouse to get after the other spouse.