So there is a great debate in the personal finance world about whether or not you should use credit cards or debit cards. People like Dave Ramsey and other financial gurus state you shouldn’t use them ever. Others argue that you can use credit cards to your advantage, they offer greater protection, and if you pay them off every month then there should be no reason not to use them.
The problem with the latter is that most people don’t pay off their credit card balances in full each month. According to the most recent statistics credit card debt is on the rise again. On the one hand you could argue that is good. People are consuming more, which drives the economy and the like. However, most people don’t pay off their debt, they get into trouble, and it becomes a cycle they can’t get out of.
Full disclosure: I was like that. I never started paying off my credit card balances until the last year or two. And the problem with that is that I overspent and it became a huge issue. When Mrs. ROB and I were married I was about $35000 in CC debt because of everything that had been rang up. I have since eliminated that debt after some consolidation and personal loans to get it out of the way. And I never want to go back to that place again.
Yet I still have a credit card. In fact it was my first financial experiment. I stated that I was going to take the year, use the credit card, and track my spending. The jury is still out on my experiment, but I can say that I have paid the balance off each month. Yet I can also probably say that my spending level wasn’t necessarily decreased because of it.
I keep a credit card around for a couple of reasons, even though I loathe them. First, I keep it around because with this card I receive 2% back that goes to my Roth IRA. I am spending the money anyway so I figured I should get something back for it. This year I have earned $500 for my Roth IRA.
Second, I keep it around because I use a credit card to “protect” myself against any financial problems. For example, a lot of people advise you to use a credit card for the protections they offer. About two years ago, Mrs. ROB and I had to rent a car over Christmas because our car broke down. During the time that we were home visiting our family someone backed into our car, which caused damage to the bumper of over $400. I don’t typically get the insurance for rental cars because I have full coverage on our cars and we sometimes get a rental car rider, which covers accidents with rental cars. However, I learned that because I used my credit card I actually had built in coverage with my card. I actually only had to pay $50 out of pocket for the damage and the rest was covered by the insurance I had with the card.
I am not sure that the coverage exists for all credit cards, but it certainly did for that one.
This anecdote brings me to a larger point, something that I have learned over the past couple of weeks.
The reason I was covered for the accident wasn’t because of a credit card it was because of the VISA or Mastercard function on my card. VISA (or Mastercard) isn’t a credit card company. They are a transaction company. They make money every time you use a card (credit or debit) because of the transaction. They get paid a small fee. Because of this they have protections in place for transactions. When you choose the credit function it has to pass through the credit card network.
In other words, what matters is the mode in which you use a card. ALWAYS CHOOSE CREDIT when using your debit card.
With your debit card it has two basic functions: the ATM function and/or what basically functions as a credit card. In the ATM function you have to put in your PIN number. If you use your PIN number and your info is stolen then you can be liable for charges up to $500. Often, however, it is less, but that depends on the bank. You are under their rules. When you use your debit card like a credit card (e.g. you don’t put your pin number in, you just choose the credit function) then you, in essence, receive the same protection that you would from a credit card regarding fraudulent charges. The reason for this is because with the ATM function, when you put in your PIN number, the merchant typically will deduct IMMEDIATELY the funds from your checking account. When you use the credit function it will have to pass through the credit network and might take a day or two to post to your account. You might even have to sign for the purchase.
How Do You Do This?
The answer is pretty simple. Anytime, you are going to use your debit card don’t choose the debit function. Choose the credit function. You may have to sign for the purchase and you can’t get cash back, but you have the basic protections of a credit card.
You CANNOT charge something on your debit card without the money in place. In other words, if you only have $200 in your checking account and you want to buy something that is $250 with your debit card you cannot “charge” it on your debit card. Your card will be declined. For a debit card, no matter if you choose debit or credit, you MUST have the money in the account to cover the purchase price.
But for added protection choose CREDIT over debit every time you use your debit card.