Why Credit Cards are Good (alternate title: Why Debit Cards are Bad)

I am a reader of the comic “Templar, AZ” (sometimes NSFW), and a one-time reader of “The Tightwad Gazette”, so when I found out that Templar, AZ artist and author Iron Spike (whose actual name I do not know) wrote a comic with another artist on how to live well but thriftily, I was all about that.

It was funded through a Kickstarter campaign well before I ever heard of it, but just yesterday the PDF went up for sale for $5, so I snagged myself a copy.

I find myself agreeing with much of the book, but a little diatribe against credit cards at the beginning really put me off. I know this has been hashed and rehashed, but credit cards are not inherently evil. If you can’t control yourself with a credit card in hand, fine, don’t use a regular credit card. The spendthrift character in the book objects by saying something like, “But, how can I buy stuff online without a credit card?”, and the penny-wise protagonist assures her that she can use her debit card instead.

This is a very, very bad idea.

Imagine this scenario: your credit or debit card (or account info) is stolen. Someone goes on a spending spree, buying $1000 worth of prepaid phone cards before the fraudulent activity gets shut down one way or another. How would this go with credit vs. debit cards?

Credit: Notify company of fraud (if they didn’t call you first, as they usually do these days). Sign a sheet of paper saying you didn’t make the charges. Get a new card. Done.

Debit: Notify bank of fraud. Probably sign a sheet of paper as above (never had my debit card / number stolen, because I DON’T USE IT), wait for the bank to put the money back into your account.

Now, it’s one thing if your debit card and checking account only had a small portion of your money on/in them. However, if you had a lot in there, you could be without a big, important chunk of your money for a long time, assuming you ever get it back. This happened to a friend of mine in grad school, and it took her I think 1-2 months to get her money back. Thousands of dollars. Just don’t do it.

If you really, really can’t trust yourself to use a regular credit card with restraint and pay it in full every month, get a secured credit card (where you load money onto the card and then spend it), or if you must use a debit card, make sure it’s well segregated from the bulk of your money. Keep it in a different bank from your savings. In fact, you should probably have another checking account as well, just open a checking account specifically for the use of that debit card.

Please stop using debit cards. The banks love them because they get merchant fees. They love them so much that most banks now charge you extra for a plain old ATM card instead of a debit card. But don’t fall for it. Use cash, use credit cards, us prepaid or secured cards, or segregate your debit card in its own bank. But don’t just go using your debit card attached to your main bank account.

The book also decries the use of credit cards as an emergency buffer. An ‘emergency’ credit card with a $20+k limit and a negotiated low interest rate in addition to your emergency savings fund could be a huge lifesaver in a major, expensive emergency, and help you build credit to get lower interest rates on, say, a mortgage. Really that’s another topic entirely, though.

End rant.

EDIT: Key point – most people think of credit cards as reasonably secure. In practice, not really. Thousands of credit (and debit!) card numbers are stolen every day, if not every hour. The whole system (at least the way the USA does it and the way most merchants seem to run their security) is full of holes like swiss cheese. Would you rather go putting your debit card number (linked to your checking account) out there, or your credit card number?