Anywhere you look, you'll find financial horror stories about people who found themselves deep in credit card debt. They tend to highlight factors that contributed to their plight like the relative ease of making charges with a credit card and how paying the monthly minimums didn't help. The truth is that credit cards are a tool for building good credit and making purchases. And, just like any tool, they can be misused and that's when trouble starts. The fact of the matter is that credit cards are far more valuable than they are dangerous and the relative safety of a debit card is no substitute for the importance of good credit.
Credit cards vs. debit cards
In a recent personal finance study, over 2,000 US adults were asked about their primary payment methods for everyday purchases. Of all of the takers, more than 2 in 5 Americans said they primarily used debit cards for their everyday purchases. That was 44% of the people surveyed while only 34% said they primarily used credit cards.*
Perhaps most interesting is that almost three-quarters of the people who claimed to use debit cards (71%) said that they had also been in credit card debt. And the real kicker: 1 in 4 Americans who took the survey believed that purchase activity on a debit card actually impacted their credit history.
The debt deal breaker
The results of the survey speak volumes when it comes to why so many Americans prefer debit cards. Unlike credit cards, your debit card is running off money that you actually have in a checking account. This makes it a lot harder to go off spending money that you don't have. But is fear of debt really a good justification to avoid all the value that credit cards can bring?
Simply put: no. The value of having good credit and all of the opportunities it presents more than outweighs the potential for falling into debt. On The Simple Dollar, we've spoken a lot about credit card debt and how to get out from under it. When you get right down to it, the potential for debt should not be a deal breaker for those shying away from credit card use. Part of having good credit means learning and developing responsible credit card use.
And for anyone who thinks their dreams of building good credit are dashed by bankruptcy: there can be life after bankruptcy.
Why good credit is so good
Unfortunately, for the survey-takers who thought they were impacting their credit history by using their debit cards, that is roundly false. While you can swipe a debit card the same as you would a credit card, at the end of the day, the purchases made do not factor into a good credit history. And you need good credit, which is why you need to use a credit card.
You can think of a credit history like a resume of your spending habits. It's your reputation for handling money and paying back what you owe. Whether you're trying to put a down payment on a nice fancy car or get approved for a lease on a swank condominium, your credit history is one of the biggest deciding factors.
And, in order to have good credit, you need to use a credit card. Now, we've talked a lot about how to build good credit. It obviously doesn't mean you should be living beyond your means, but in order to amass a decent credit score, you need to prove you can be trusted with the freedom of a credit card. You can't do any of that with a debit card, unfortunately.
Credit cards are your friends
At the end of the day, how you choose to make your everyday purchases is up to you. However, understand that by deferring to debit cards, you severely limit your opportunities down the road. While credit cards present the potential risk of credit card debt, it's not a guarantee and is easily remedied with responsible use. Plus, the value that having good credit can bring more than makes up for the possible risk.
* Nerd Wallet, Americans Favor Debit Over Credit for Their Go-To Card, Erin El Issa, September 7, 2017
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