by Damon Carr, for New Pittsburgh Courier
There’s a trending video on social media called “Credit Card VS Debit Card”. Five people sent me this video, wanting my perspective. In this video, the speaker firmly believes that credit cards are superior to debit cards. He refined his argument on 3 key points, zero liability, using other people’s money and increasing your credit score. I’ll summarize and transcribe some of the main takeaways from the video below: I’ll also provide some commentary. Let’s just say I disagree with his premise.
Damon: In fact, the worst financial tool ever offered to the American consumer is the credit card. Let’s put aside the fact that interest rates on credit cards are DOUBLE DIGIT up to 25%. Unlike credit cards, when you use debit cards, it forces you to “make your paycheck” and only use the money you have in your account. Thus, it eliminates the risk of going into debt.
He thinks credit cards are the safest way to pay: How do I eliminate 99.9% of my personal liability in the snap of a finger? I use the most secure form of payment on planet earth and it is a credit card not a debit card.
Damon: Safest ! ? Did he forget “Cash”? Cash is not always the most convenient payment method. But it is certainly the safest payment method. When he mentions removing 99.9% of personal liability, he is suggesting that identity theft is at stake. Using cash offers 2 types of liability protection. 1. If you pay cash, you are not at risk of identity theft. 2. Using cash eliminates the risk of debt! Coincidentally, debit cards and not credit cards are the modern equivalent of 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 is in a money market account that earns 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 round with my card. I travel all over the world. While waiting to be reimbursed, I use my Bank Card. If I need euros, I go to the ATM and get euros with my credit card.
Damon: Seriously. Do you use credit cards EVERYDAY for EVERYTHING? I bet he accumulates airline miles and cash back, which equals 1 cent for every dollar spent. He’s such a good credit card user that he gets maybe 3 points or 3 cents for every dollar spent. What sense does it make to run the risk of overspending, which people do when they use credit cards, while earning less than 3% interest on a money market account? Not to mention the double-digit interest rate to which it is subject. Withdrawing foreign currency from an ATM abroad exposes you to high interest rates on cash advances and foreign exchange fees. Traveller’s checks are no longer widely used, but prepaid VISA cards will do? If he is waiting to be reimbursed, it means he is on a business trip. Two of my previous employers issued me a corporate employee credit card for travel to the United States. His company makes him travel all over the world at his own expense? Maybe he is the owner?
He increases his credit score by using credit cards: Every day, I use my card. If I pay the bill in whole or in part, my credit rating increases. I accumulate credit while using this credit card.
Damon: Take note of the words “if and or”. This implies two things. 1. He doesn’t always pay the full balance each month. Which means it’s hit with a double-digit interest rate. 2. What happens “if he doesn’t pay” or “if he can’t pay”, then what happens to his credit score? Answer: it falls!
Zero liability when using credit cards: I will do everything to protect my personal information, but if tomorrow someone gets my card number and charges $1 million to my credit card. Under federal law, my liability is zero. I have no responsibility. When you use your debit card, every time you pick it up, you’re exposing the money in your account. The only person who will be robbed is you. When you use your debit cards, you can use them for the next 50 years, 20 times a day, and you won’t increase your credit score. When you use your debit card, you are liable up to a certain amount and it takes some time for your debit card to be repaired.
Damon: Zero liability protection is available for 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 is important that you immediately report your stolen card or any fraudulent activity. The sooner you report, the less personally liable you will be. Put that into perspective. You are more likely to notice lost/stolen or fraudulent activity on a debit card than on a credit card, because your personal money is at stake. Finally, he is right, if fraudulent activity occurs on your debit card compared to your credit card, part of your money is blocked while it is under investigation. What he failed to mention was the likelihood of the event actually occurring. Suffice it to say that you are more likely to run up debt on a credit card than to be a victim of fraudulent activity on a debit card.
Generational debt: I had three sons who went to college. I gave them all the credit cards. No debit cards. I guaranteed the card. Since I guaranteed the card, 3 things have happened. 1. Bills come to me. I am responsible for the bill. If you spend a lot of time at the bar, I’ll find out. 2. Whatever amount I want you to spend while you are in school, I set that limit. 3. Every month I pay the bill, it will increase your credit score. When you get out of college, if you want to buy a house or a car or an apartment, you won’t need me to co-sign for you. One of the best things you can do is teach them how to use credit early and build credit on their behalf.
Damon: Savings are the cornerstone of sound money management and wealth building. The best thing you can do is to teach your child the importance of saving. If you’re a big fan of helping your child build their credit rating, here’s an idea: get a secured credit card. It is a credit card that is secured with saved money. This will help establish and build credit, but if you can’t pay, the money securing the credit card will pay the balance, preventing the account from going into collection.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website @ www.damonmoneycoach.com)