Like having a credit score, whether you should have a credit or debit card (and how many credit cards to have) isn’t a clear cut strategy in the personal finance realm. Some gurus are big proponents of credit card hacking for travel rewards, etc. while some say you shouldn’t use a credit card at all. We are here to settle the debate.
- While having a credit card means having to make an extra payment, you should be on the website downloading and reconciling your statement monthly, so it isn’t too much additional lift
- If you can’t remember to (or afford to) pay off the balance on time every month, you shouldn’t have a credit card
- Credit cards can offer some cool perks and cash back rewards, including extra levels of protection, but make sure they ROI versus spending habits and annual fees
- There are debit card options that help build a credit score if you need a stop gap from credit card debt but want an easier time getting a car loan or mortgage
We were at our friends’ house the other day catching up. Our friend turned to me, as one does, and said something like, “We have a question we wanted to ask you.” He—let’s call him Jay—then eyed his wife, who I was sitting with—let’s call her Silent Bob—and asked “Did you ask already?”
My gut reaction was ‘oh God, it’s about to get awkward turtle up in here.’ I braced for impact, ready to blurt, “I’m not even supposed to be here today!” depending on what was about to launch my way.
Our friend Jay continued, “We’re thinking about getting rid of our credit cards and just using a debit card. The protection is the same as they’re both Visas, but it’s a hassle having to pay the separate credit cards every month.”
This question, unlike many that randomly spring up in the middle of unrelated conversation, was one this nerdy budget BO$$ was happy to dive into.
I’ll save you from my terrible memory trying to rehash the entire conversation, but on the way home that afternoon, I realized hey, this could make an interesting article for The Budget Brigade, especially since we recently discussed our adventures having an indeterminable credit card.
The headache of having to make separate credit card payments
I’m all about KISS—keep it simple, stupid.
It’s one of the reasons we were a one credit card household for so long. Having to reconcile a bunch of different credit cards and a bank statement to our app where we track all our spending in one place feels like it requires an A Beautiful Mind level brilliance some months. Especially since our credit card and bank statement don’t post on the last day of the month together, meaning when I do my end of the month close out before doing account transfers for investing and sink funds, I end up looking at a bunch of stuff twice. It’s a pain in the ass.
Yet, I’m a firm believer that everyone should go through their statements once a month, every month. For one, this helps you catch all the pesky subscriptions that auto renew that you don’t actually use and can cancel. For another, it helps you monitor and check against fraudulent charges made on your account that your bank doesn’t catch and alert you of.
And honestly? Sometimes seeing the full statement balance can be the cooler full of Gatorade over the head wake up call that holy guacamole, spending got out of hand this month and maybe I ought to return some stuff to Amazon before my payment is due.
Whether you make these purchases with a debit or credit card, checking the purchases has the same amount of lift. Although the more cards you have, the harder it is to shuffle them all and figure out what the duck you or a family member bought at Walmart two and a half weeks ago for $34.76. This is one reason I try to limit the number of cards I have. Keep it simple. Remember any time you may spend screwing around with a bunch of different cards has an associated opportunity cost as you could be doing something more fun or better targeted to generate wealth.
If remembering to make the payment is a pain, see if your card company offers an autopay option. While I’m very Ron Swanson and limit who has auto-draft abilities to my bank account, I do have account transfers set up so that it only takes about 60 seconds to make my credit card payment once I’ve confirmed that, oh right, that was me spending $34.76 at Wallyworld, no worries on fraud here.
Let’s assess the opportunity cost—an extra minute a month, so about 15 minutes a year to round up for buffer—earns me around $850 a year in credit card rewards points. That’s around $3,400/hr. While I wish I got paid that at my day job, I make orders of magnitude less, so it’s worth the extra lift for me.
The more cards I add to the equation, the more time it takes to juggle the reconciliation. That $3,400/hr rate nosedives quickly, especially if I accidentally miss a payment and get hammered with a late payment fee and interest.
If you can’t remember to make the payment, or can’t afford to pay for your spending at the end of the month, credit cards aren’t for you. Stick with the debit card. Or even cash for a season.
Let’s talk about them credit card rewards
Credit card rewards are one of two primary reasons I prefer using a credit card. I LOVE free stuff. As I’ve mentioned before, we save our credit card rewards points all year and then cash them out every November to go toward our Black Friday/holiday season budget.
As mentioned in the intro, many people like the credit card travel hacking game. For me, this violates the KISS simple as opening and closing cards or opening and tracking a bunch of different cards I have to shuffle seems like it would take a lot of mental energy. Plus, it could open me up more to potential fraud. I’ve also heard some cards have annual fees of like $800, which makes me what to uptown chuck. Paying for free perks makes them feel a lot less free.
If you travel a lot on expensive flights and stay in nice hotels, it might be worth the cost. It’s worth sitting down with your previous budgets to see how much you’ve spent on travel and how much you could save. (Make sure you understand the restrictions of redemption on your travel rewards before forking over those eight Benjamins.) We usually road trip and stay in tiny little towns on the outskirts of Nowhere, US where national parks are, so in this season of life, travel rewards don’t benefit us much. That’s why we selected a cash back rewards card.
The big anti-credit card opponent in the game *cough*Dave Ramsey*cough* says you spend more when you use a credit card, which negates the 1%-2% cash back you get in rewards. We did a trial study of his cash envelope system in our household for about two months. It was a PITA but did prove his point—when I had to fork over actual dolla dolla bills, y’all, it was painful. (It was also really hard to track spending in the budget, but that’s a story for another day.)
The same, however, isn’t true with our debit card. Swiping a debit card to us is the same as swiping a credit card, so his rationale is dead in the water in the credit or debit card debate, at least in our house.
Experiment for yourself! Behavior weighs heavily into personal finances. If you find you spend less monthly using a debit card than a credit card, it may well be worth the switch for you. If you save more than 2% in spending, you’ve already out earned your rewards perks.
Credit versus debit card protection
While Visa debit cards do have levels of fraud protection, I’m hesitant to say that they’re the same. I’m not a credit card expert by any means, so feel free to show me otherwise. I’m always happy to learn.
Credit cards often offer perks that add extra levels of protection, including:
- Credit score monitoring
- Extended warranties
- Phone insurance
- Purchase and theft protection
The other big difference is what happens when there is fraud. With a credit card, you can call the company and let them know. They will investigate the charges, but won’t charge you for them until they finished their investigation, so you don’t have to front the cash for the fraud.
With a debit card, the fraud charges hit your checking account, and you have to try to claw them back from the bank after the fact. Depending on how many gas stations or Best Buys Bonnie and Clyde hit up before discovered, this could wipe out your checking account, especially if you’re on the first few rungs of our FIRE ladder trying to put out a dumpster fire of debt. While you’ll eventually get your money back, it may not stop other payments from bouncing and causing a lot more stress in an already stressful situation.
We like having that extra degree to Kevin Bacon between automated and fraud transactions and our bank account. I don’t have any automated bill pay through our checking account, not even for utilities. I enjoy buying nerdy national park and Star Wars stamps and mailing a check to make sure the water company doesn’t misread my meter and charge me an extra $100 again.
There are options like privacy.com that allow you to make virtual credit cards with set spending limits, which can be another way to add a level of fraud protection without having to juggle credit cards or worry about credit card debt. We haven’t personally used them, so we’d love your input in the comments if you have.
Overdraft fees using a debit card versus a credit card
But what if the overdraft situation isn’t caused by fraud? What if it’s just life doing life?
In this situation, we don’t recommend a credit or debit card.
If you make enough money to pay your bills each month, but not when they’re due, and have to float them on a credit card until payday, you need an account buffer in your checking account to address the issue.
If some months you’re the government and running a budget deficit, addressing the outgoing versus incoming with a detailed budget is priority number one to help get you to a better financial foundation.
Building a credit score with a credit versus debit card
But I don’t build credit with a debit card!
We talked a bit about where having a credit score can be important and potentially save you money in our undeterminable credit score story a while back. To build credit for my husband, he had to get a debit card that acts as a credit card. Sure, it’s geared toward college students, but they don’t need to know he graduated a hot minute ago.
If you have a track record of struggling with credit card debt but want a credit score to get a better rate on a mortgage or car loan, you can consider one of these cards as an alternative. They set a daily limit that you can charge based on your account balance (my husband was so excited this past weekend as they just upped his limit; it’s the simple things in life). At the end of every day, it adds up the charges and drafts that amount from your checking account.
Honestly, I’m not a fan of this auto draft to our checking account, but it’s the devil we dance with to be invited to the credit score ball for this season in life. The card seems to offer some perks too, so it can be a good compromise for people with FOMO for credit card rewards but who need protection from overspending more than they can afford.
Conclusion on the credit or debit card debate
There you have it! Our definitively undefinitive conclusion on the credit or debit card debate. As is the case with a lot of our advice, the answer is, “It depends.”
Assess (honestly, and without guilt or shame) your spending habits and tendencies to measure if you can handle the responsibility of credit card use versus the insanely high interest rates they charge on carrying a balance. See if the travel or cash back rewards ROI for your particular situation and spending habits. Weigh the different benefits and risks of both a credit card and debit card to determine while is the better fit for you. And remember, KISS.
I promise, getting rid of your credit card if you want to and losing out on $700 of cash back rewards a year won’t prevent you from achieving your vision of financial independence. But paying $700 a year of interest on each credit card you have while struggling to make minimum payments and not being able to save for retirement may.