A number of years ago, I discussed the cash or credit question on this blog. And I have to say, my opinion hasn’t changed much. But in the intervening years (I say that as if this is something I have been pondering since 2008), I realized that I missed something in the discussion – debit!
Let’s break it down very simply. When you go to a store and pay for an item, you have three basic ways to pay for something: in cold hard cash, by swiping your credit card, or by swiping your debit card.
Cash, Credit, or Debit?
It’s pretty obvious how cash works. You exchange it for the item you are purchasing. In a way, debit is similar. To oversimplify, when you swipe your debit card, the money is taken out of your bank account and given to the merchant. Credit is a little different. You swipe your card and the credit card company pays the merchant. By swiping your card, you are promising the credit card company that you will pay them back for the transaction. If you do it within a certain period of time, the transaction is free (to you, anyway). If you prefer to pay only part of the amount, the credit card company will charge you interest on that payment. You’re essentially borrowing money from the credit card company that you have to pay back.
(As an aside, this explains how people get into trouble with credit cards. With debit cards or cash, you can’t really spend more than you have. With credit cards, you can spend up to your credit limit. I don’t know about anyone else, but my credit limit on my cards is stupidly high. I could get into a lot of financial trouble if I spent to my limit.)
So it sounds like credit cards are bad and I probably just use cash and debit, right?
Nope! In fact, I rarely use either!
My Pick: Credit Cards for the Win
I am kind of afraid of debit cards. I’ve had my credit card number compromised before, and it’s no big deal. The credit card company takes care of any fraudulent charges, and they send me a new card with a new number. Easy peasy. But I have heard horror stories of debit cards being compromised. I’m not talking about situations like the Target breach, where most people didn’t have money taken out of their account, but rather situations where someone gets their hands on your card info and withdraws money. Sure, the bank will ultimately get you that money back if you catch it fast enough, but until all the paperwork is done, that money is simply gone! That could cause real problems when it’s time to pay the mortgage and you don’t have the funds available. Therefore, I pretty much never use my debit card.
I also rarely use cash. Why? Because it’s so much harder to track. In a perfect world, I would track every single financial transaction I make the moment I make it. I have an app on my phone that I can use, so it would be easy. But in reality, I just don’t do it. I never got into the habit. So instead, once a week or so, I log into my credit card accounts and download all of my transactions. It’s a really easy way to see where my money is going. I joke that cash just tends to grow wings and disappear. I can’t ever track back where it went. Sure, sometimes cash is a necessity, and I’m always careful to have at least a little bit of money on my person, but my day to day transactions are all done on credit.
Of course, as I have discussed, this is doable for me because I pay the entire balance on my credit cards every month. I’m not spending money I don’t have and I’m not racking up interest charges. I’m also getting rewards points, which is a fun bonus. But even without the rewards, I think credit would be the way to go for me. It seems safer than debit and is easier to track than cash.
So in the debate, for me, the answer is always credit. Which side do you fall on?