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  • Writer's pictureNicholas Pihl

Should I really use a debit card instead of a credit card, like Dave Ramsey says?

This fall, I started an experiment where I stopped using my credit card, opting instead to pay for everything with a debit card. I'd been reading a lot of Dave Ramsey, and he always talks about how people spend less when they use cash vs credit, so I was curious to see if there was a difference between using one card (credit) vs another (debit).

The result was startling. Even though I had never carried a balance from month to month on my credit cards, I found that I spend about 12% less per week when I consistently use a debit card vs a credit card. Unless I find a magical credit card that pays 12% in cash rewards, I'm better off just using debit.

This 12% difference is a testament to the brilliance of the credit card companies and their mastery of psychology. There are two main reasons people spend more with a credit card.

Most importantly, a credit card creates a delay between the time you purchase something and when you pay for it. That delay separates our purchase from the "pain" of spending money. The pain comes later, in the form of a credit card bill. Importantly, that pain is not attached to any single item, but to a general sense of "I spent too much money."

All we see are a series of purchases which are all just a little too high. It takes a lot of thought and detective work to remember what we specifically bought, and what particular purchases put us over the edge of our budget. This makes it very difficult to learn from our mistakes and adjust our behavior.

Second, is that the "points" create a bizarre form of mental accounting. All we see are the rewards for overspending, decoupled from the rest of our budget. Like Pavlov's dog, we are trained with a weird, semi-conscious thought-pattern: "If I spend more, I get more points." This is irrational, because what you should logically want is more dollars, and you're far better off from not spending $1 than you are spending $33 to get $1 of rewards points. If and when we overspend on something, we think (delusionally), "well at least I'll get a lot of points for that." Maybe your brain doesn't work like this, but mine absolutely does.

As for reasons not to use a debit card, I find that most of them no longer apply. As of a few years ago, most debit cards offer the same protection against fraud and theft as credit cards. Now, you might argue that it's better to lose the bank's money than it is to lose your own money, and you'd have a point. But you also risk far larger amounts with a credit card than with a debit card. Personally, my credit card limit is $20,000, an insane amount relative to my weekly spending or even my income. Meanwhile, I only ever keep about $1000 in my checking account, and I have overdraft protection turned off. That's important, because it means any transaction that drafts over $1000 will not go through, and will instead trigger security alerts at my bank.

In the event that the bank does not return my money, I'd rather be out $1000 than $20,000. If the bank owes me $20,000, I almost certainly have to hire a lawyer and spend months of my life in a legal battle over that money. And for $20,000 I'd be crazy not to. For $1000, I'd still try pretty damned hard to get it back, but I'm not spending more than 50 hours on it (I think my free time is worth at least $20 an hour), and I'm probably not bothering to hire a lawyer.

Which brings me to my last point. I like using debit and cash because it keeps my life simple. It helps me feel more in control of my money because I always know exactly how much I have and how much I've spent. I hate that feeling of seeing $2500 in my checking account, and then realizing it's really only $1000 because I owe $1500 on my credit card. I'd rather just see the $1000. Maybe I'm crazy.

Finally, I find that there's a lot of peace from not owing anybody any money. Debt hangs over your head, it feels terrible. Even if I spent the exact same amount with a debit card as I do with a credit card, I'd still forgo the 3% of points in favor of peace of mind.

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