In the modern world, it’s nearly impossible to get by without using plastic. From ordering products over the internet, to paying bills online, to paying for gas at the pump without having to go inside, cards are used for just about everything.
Plastic is also thrown your way at an excessive rate. Chances are, you get several credit card offers in the mail each week. Television commercials are covered with ads from various credit card companies. When you sign up for a bank account, you’re given a debit card that can be used to make purchases just like a credit card.
So, it seems you have a choice. Do you use a credit card to pay for your purchases, or do you whip out the trusty debit card? Well, both have advantages and disadvantages. Let’s take a look at each in more detail, so you can decide which is right for you.
At the surface, credit cards seem to be a great deal. They are free to use (any card worth having won’t have an annual fee), give you large lines of purchasing power (debit cards often have daily usage limits), offer complete fraud protection against unauthorized purchases, and sallow you to “charge back” items that are broken, incomplete, or are sold to you in a situation where the seller is trying to rip you off. Some cards even offer you as much as 3% cash back just to use them.
Looking at these facts, why wouldn’t you use a credit card instead of a debit card? On paper, it seems like a great idea. Plus, every time you use and pay your credit card, you are building your credit history, and helping to raise your FICO score.
Well, let’s take a look at some global figures. In America, the average person who has at least one credit card owes $9,200 in credit card debt. In Australia, the numbers aren’t so bad, but the average person owes more than $2,500.
You see, there’s a reason credit card companies offer you perk-after-perk to take their cards. On a mathematical basis, it is very profitable to do so. The average customer makes them thousands of dollars in interest charges, over the limit fees, and late fees. Credit card companies can be very sneaky in how they charge their fees. For instance, they may delay specific purchases you’ve made from subtracting from your “available credit” number, to encourage you to exceed that limit. The fee for going over your limit is often in the range of $25 to $50.
If you were to treat a credit card exactly like a debit card, making only entirely reasonable purchases, and paying off every single cent in full before it is due, they would be great for you, and there would be no need at all to ever use a debit card. Every single credit card company would also immediately go out of business.
As much as you may want to think that you are perfect, and “that would never happen to me”, you simply have the face the fact that the average person who has a credit card will go into debt. At this point, maybe that’s not an idea in your head, but there is a good chance that a large expense will come up, or there will be something you just really want to buy, and that credit card will be ever so convenient. It’s a risk you really cannot afford to take.
The average person spends 18% more when buying with a credit card verses a debit card. Even if you are not going into debt, simply knowing that it will be 30 days or so before you have to pay the bill can be enough to push you towards larger purchases.
That doesn’t mean credit cards are bad. If you are poor at managing money, maybe it would make the most sense to just use a debit card. However, credit cards do help build your credit history, and can be safer to use for some purchases.
So, what’s the answer then? Do you use a debit card, or a credit card?
Really, the best way is to only have one credit card, and to carry it with you so that it is always on hand for emergencies. You should use the card at least once per month, to help build your credit history, and you should pay it off in full. However, the trick here, is to only use the card for necessary purchases. Online bill paying, grocery purchases, and buying gas are 3 areas you can restrict your credit card usage to. By avoiding using the card on “fun” transactions, such as going out to eat, buying clothes, electronics, or other “toys”, you can make sure you spend exactly what you would paying cash for everything.