Recently the NerdWallet blog did a survey of more than 2,000 adults in the United States with regard to their use of plastic. Turns out that younger people prefer debit to credit.
The findings didn’t surprise me. But they did concern me.
Without credit use, you can’t build a good credit history. Without a good credit history, you will likely pay more interest than those without decent credit scores – that is, if you can get a loan at all.
This probably isn’t something people want to hear right after the Equifax data breach. But it’s something they need to know.
After all, it isn’t just lending specialists who will look at your credit report should you want to finance a car or buy a home. Potential landlords and employers might want a peek, too. How much are you willing to gamble on the kindness of strangers?
Specifically, how likely is it that these folks will look past your thin credit report, or your maxed-out cards and charged-off debts, and see that you really are a good person who deserves a second chance?
When ‘credit or debit’ is complicated
More than 4 in 10 (44 percent) of those surveyed rely mostly on debit cards for everyday purchases. People over the age of 65 are the most likely to favor credit cards* for things like groceries, gas and entertainment.
When asked about the emotions they associate with debit use, the big winners were:
- Responsible (56 percent)
- Secure (49 percent)
- Limited (31 percent)
Compare those with these feelings engendered by credit card use:
- Anxious (24 percent)
- Overwhelmed (also 24 percent)
- Impulsive (29 percent)
The anxiety I can certainly understand: Am I going to be able to pay off this bill next month? Maybe that’s why “secure” and “limited” popped up so often in discussions of debit card transactions. The users know they can’t spend what they don’t have.
Which is, of course, a darned good reason to use a debit card: Your spending is limited to what’s in the account. (Well, what’s in the account minus pending bills.) The word “impulsive” comes into play here, too. If you can’t trust yourself not to go a little blood-simple and spend way more than you can afford, then stick to debit.
Yet that attachment to your bank funds is also a good reason to be wary of debit card use. Someone who gains access to the card can siphon a lot of money from your account in a very short time.
Will you get the money back? Probably. But you might wait days or weeks while the bank conducts its investigation. In the meantime, would you be able to cover the bills? (Hint: The mortgage company probably doesn’t care that you got hacked. It just wants the payment.)
Credit or debit: Two workarounds
Debit cards can keep you from overspending, but they don’t help you build that vital credit history. How can the people who fear they’d overspend/have overspent in the past get around this?
You could ask to become an authorized user on a relative’s card. The question is whether you can conquer your overspending tendencies. If you don’t feel you can, don’t take this route. Or try it this way:
- Shop only with this relative (say, a grocery run)
- Immediately hand over the cash to cover what you just spent
- Then give the card back and say, “Thanks! Same time next week/month?”
Another of my go-to suggestions is to set up auto-pay of a regularly occurring charge, then either put the card in a safe deposit box or in a place you can’t easily access. (Favorite anecdote: the woman who taped the card to the back of a heavy piece of furniture, then had her boyfriend push it up against the wall.)
Right now I’m very fond of a couple of rewards credit cards – one for business use and the other for personal transactions. Yet there’s another card, one that I’ve had for more than 20 years, that I’d like to keep open. That’s why I put a utility bill on that card: The plastic stays active, and I can concentrate my purchasing power on the cards that bring me better rewards.
It’s a win-win: I get a clean credit report and healthy score, and the rewards card points pay for much of my holiday shopping. Gift-giving matters to me. So do a few treats when I travel. One of the things I brought to Phoenix last month was some Red Robin scrip I got by cashing in some points. Since it was Abby’s birthday month, her meal was free; the meals consumed by her husband and me were mostly covered by the card.
“For a majority of Americans who have their (cards) under control, they’re a valuable tool,” says Kimberly Palmer, a credit and banking expert at NerdWallet.
Credit or debit: Playing the game
Yes. A tool. You can use a hammer to build a deck, or you can bash a thumb and ruin your day.
If you can trust yourself with the plastic, charge items you were going to buy anyway and pay the balance in full each month. Fun fact: You can pay your bill as often as you want.
One woman I know does this weekly. Try this! The sight of a reduced checking account balance is a good reminder that maybe you shouldn’t go to the ball game or your BFF’s housewares party.
These are some of the tips I offer in the credit-focused chapter of “Your Playbook For Tough Times, Vol. 2: Needs And Wants Edition.”** I urge you to find your own safe, sane ways to use plastic. Even if it’s just for one or two bills per month (utilities, orthodontist, whatever), you’ll be showing the powers that be that you are responsible.
Why should we have to prove ourselves? Because that’s the system we have right now. Is this fair? Not particularly.
When I managed an apartment building I had to order credit reports on potential renters. Some people hung up the phone when I mentioned that. Others pleaded that their dicey credit reports weren’t due to irresponsibility but rather than medical debt, divorce or protracted unemployment.
Didn’t matter. The building owners wouldn’t even consider them. And yeah, that stinks. As I note in the book:
“(The) current reporting system is a de facto penalization of those who chose to pay cash on the barrelhead and those who had serious illnesses or other problems that caused debt (or maybe bankruptcy). But opting out of credit is like acting as your own attorney because you think lawyers charge too much.
“The cost of making that stand is way too high. A savvy consumer will learn to work within the current system.”
So, readers, how about it: Do you opt for credit or debit? Why?
*Note: If you’re looking for a new credit card, please consider checking them out via the ad on the right-hand side of this page. Any time someone signs up for and receives a card, I get a finder’s fee. This helps keep the blog lights on.
**Through the end of this month you can get the PDF version of the new book for $5 by visiting and using the code DEBITCREDIT.
Related reading:
- Credit card debt got you down? You’re not alone
- Nearing retirement? Check your credit
- Credit score myths that will. not. die.
Growing up I didn’t have the best examples of using credit wisely. I know that is why I developed my own bad habit that got me into major trouble in my early 20’s. After slogging along and digging out I one again found myself with a credit card balance higher than I felt comfortable with. Yeah lesson NOT learned. I dug in and once I hit zero I decided never again. I’ve done very well the last few years. I use credit cards for just about everything I purchase every month… but I pay it off EVERY month too. I don’t have a debit card. I am not perfect I have slipped a few times but over all I have not had a revolving balance for several years.
Credit, because of travel rewards credit cards. I set an autopay on each card for the total statement balance each month. Of course, I don’t think it’s a good idea for those that tend to carry a balance.
I have a friend who has $1M in savings, much more in investments, plus a military retirement coming in each month. He has several credit cards he uses and never carries much cash. He charges everything, every day, and every night he pays off what he charged that day, all online.
In the last two years he has gotten into real estate, renting the houses or flipping them. He has done all this by judicially using credit cards.
Of course, he never buys a gift for anyone or buys dinner for any woman he is interested in. However, anyone who shows up at his house is fed royally.
He helped a guy with bad credit by using the guys new card as his own and paying it off that night. After six months the guy’s credit score went up, and he could do things with a good credit score. The guy is doing well now, thanks to help with a credit card used by my friend. I think it is bizarre, but it worked.
My son is a grad student with an adult household (grad student girlfriend with her own income, 2 dogs, apt.)
He’s an authorized user in NY credit card. His card was recently compromised. The card went under investigation and the fraudulent charges immediately reversed. He couldn’t afford those new charges. I’m glad neither of us had to pay them
Should have read “on my credit card”
How interesting! I used to also opt for debit cards since I was afraid of using my credit card irresponsibly (I had zero self-control). I put all of our living expenses on a cash rewards credit card. We pay it off at the end of the month and reap that sweet, sweet 2.5% cashback.
For small purchases and toward the beginning of the month, I use debit because if I hit 10 or 12 transactions (two different accounts) I get ~3% on my checking account balance up to 10k. Toward the end of the month or for large purchases I use credit with rewards.
I’m digging out from under a mountain of debt. Cash is my preferred method of payment, followed by debit.
I used to use a debit card for most of my transactions, and now I’ve switched to a rewards credit card. I use it for most things, and I like getting cash back. Last month I paid for tuition and textbooks with the card, then paid off the card and collected the cash back.
We used debit in our home, except for one monthly bill that comes out of my husband’s American Express. We have no debt whatsoever. Our home is paid off, drive paid for cars, our four children college educated with no debt etc.
It’s definitely a game out there. I suppose my husband has a credit history with the American Express. Isn’t it strange that people with the best history of money management might be denied credit because they don’t go into debt? Crazy. Some financial gurus say to aim for a credit score of zero. I’m in that corner.
I agree it’s not fair. However, you don’t know what will happen in the future and for that reason you need to have at least a good enough score that you won’t have trouble getting a loan.
“But my car/house is paid for and I’m never going to need another loan because I’ll pay cash!” some people say.
Again: You cannot see the future. A shocking divorce, sudden illness, major house issue…We all like to think nothing bad will happen to us, but we can’t be sure. That’s why we have insurance. That’s why we need good credit scores even if we hate playing the game.
(That thumping sound you hear is me getting down off my soapbox.)
*Use* debit as in that’s how we do it presently!
We’re actually using our debit card on a regular basis and avoid using credit 😀 With credit cards come great responsibilities and, frankly, we’re not ready to handle credit card debt any time soon. We’re better off to just avoid it.
A wise woman knows her limits.
We’ve been using mostly debit, especially for basic expenses, but I’d like to transition to credit, primarily for security’s sake. The trick will be to avoid overspending–something that would be far easier if I were the one doing the majority of the shopping.
What I’d like to do after we retire a little more of our current debt is to set up a low-limit rewards card specifically for gas, groceries and incidental household expenses, to be paid off monthly, with all four of us as authorized users. In addition to better expense tracking, this will have the dual advantage of giving our sons a chance to build up their credit (with less chance of impulsive overspending) and eliminate the hassle of having to scrounge for cash every time I ask them to pick something up at the store.
Sounds like a plan. Note: If you put your sons on as authorized users, make sure the card reports their info the credit bureaus.