by Damon Carr
For New Pittsburgh Courier
There’s a video trending on social media entitled, “Credit Card vs. Debit Card.” Five people sent me this video, wanting my take on it. In this video the speaker is an avid believer that credit cards are superior to debit cards. He honed his argument on three key points; zero liability, using other people’s money and increasing your credit score. I’ll summarize and transcribe some of the key takeaways of the video below: I’ll also provide some commentary. Let’s just say, I disagree with his premise.
He hates Debit Cards: I never owned a Debit Card. I never allowed my three sons to possess one. Debit Cards are the worst financial tool ever given to the American consumer.
Damon’s Take: Actually, the worst financial tool ever given to the American consumer is Credit Cards. Let’s put aside the fact that interest rates on credit cards are DOUBLE DIGIT as high as 25 percent. Unlike Credit Cards, when using Debit Cards it forces you to “act your wage” and only use money you have in your account. Thus, it eliminates the risk of running up debt.
He thinks Credit Cards are the safest form of payment: How would I remove 99.9 percent of my personal liability with the snap of a finger? I use the safest form of payment that exists on the planet earth and that is a Credit Card not a Debit Card.
Damon’s Take: Safest!? Did he forget about “cash?” Cash isn’t always the most convenient form of payment. But it’s most definitely the safest form of payment. When he mentions removing 99.9 percent of personal liability, he’s suggesting identity theft is at play. Using cash provides two types of liability protection. 1. If you pay using cash, you’re not exposing yourself to identity theft. 2. Using cash eliminates the liability of debt! Coincidently, Debit Cards, not Credit Cards, are the modern-day equivalent to using cash.
He uses his credit card for everything, EVERY DAY: Every day of my life, I spend their money. I don’t spend my own money. My money sits in a money market account earning interest. I use my card for dry cleaning, groceries, and gas. I pay rent to the Marina to keep my boat in the water all year long using my card. I travel all over the world. While I wait to get reimbursed, I use my Credit Card. If I need Euros, I go to the ATM machine and get Euros with my credit card.
Damon’s Take: Seriously. You use Credit Cards EVERY DAY on EVERYTHING? I bet he’s racking up the airline miles and cash back rewards which is equal to 1 penny for every dollar spent. He’s such a good credit card user, maybe he gets 3 points or 3 pennies for every dollar spent. What sense or cents does it make to run the risk of overspending which is what people do when they use credit cards, while earning less than 3 percent in interest on a money market account? Not to mention the double-digit interest rate he’s subjected to. Pulling foreign currency from an ATM overseas subjects you to high cash advance interest rates and foreign currency fees. Traveler’s Checks aren’t widely used anymore but prepaid VISA cards will do fine? If he’s waiting to get reimbursed, it suggests he’s on a company business trip. Two previous employers issued me an Employee’s Business Credit Card for traveling within the U.S. His company has him traveling all over the world on his own dime? Maybe he’s the owner?
He’s boosting his credit score using Credit Cards: Every day I use my card. If I pay the bill in full or part of the bill my credit score goes up. I’m building credit while I’m using that credit card.
Damon’s Take: Take note of the words “if and or.” It implies two things. 1. He doesn’t always pay the balance in full every month. Meaning he’s hit with a double digit interest rate. 2. What “if” he doesn’t pay “or” he can’t pay —what happens to his credit score then? Answer: It drops!
Zero Liability when using Credit Cards: I’ll do everything to protect my personal information but if tomorrow somebody gets my card number and charges $1 million on my Credit Card. By Federal Law, my liability is zero. I have no liability. When you use your Debit Card, every time you reach for it, you’re exposing the money sitting in your account. The only person is going to get robbed is you. When you use your debit cards, you can use it for the next 50 years—20 times per day and you will not raise your credit score. When you use your debit card, you are liable up to a certain amount and it takes a while for you to get your debit card fixed.
Damon’s Take: There’s zero liability protection available to both Credit Card and Debit Card users. The maximum liability with a credit card is $50. The maximum liability with a debit card is $500. With a debit card, it’s important that you report your card stolen or fraudulent activity right away. The sooner you report, the less you’ll be personally liable for. Put that in perspective. You’re more prone to notice lost/stolen or fraudulent activity on a debit card than you would on a credit card—because your personal money is on the line. Lastly, he’s right, if fraudulent activity occurs on your debit card vs your credit card, a portion of your money is tied up while it’s under investigation. What he failed to mention is the probability of the event actually occurring.
Suffice to say you’re more likely to run up piles of debt on a credit card than you are to be a victim of fraudulent activity on a debit card.
Generational Debt: I had three sons that went to college. I gave them all credit cards. No debit cards. I guaranteed the card. Since I guaranteed the card, three things have taken place. 1. The bills come to me. I’m responsible for the bill. If you spend a lot of time in the bar, I’m going to know that. 2. Whatever amount I want you to spend while you’re at school, I set that limit. 3. Every month I pay the bill, it will boost your credit score. When you get out of college, if you want to buy a house, car, or condo, you’re not going to need me to cosign for you. One of the best things you can do is teach them to use credit early and build credit in their name.
Damon’s Take: Saving money is the cornerstone of sound money management and wealth-building. The best thing you can do is stress to your child the importance of saving. If you’re an avid believer in helping your child build their credit score, here’s an idea—get a secured credit card. It’s a credit card that is secured with money saved. It will help establish and build credit—but if you can’t pay, the money securing the credit card will pay the balance—thus avoid account going in collection.
(Damon Carr, Money Coach can be reached @ 412-216-1013 or @ www.damonmoneycoach.com)