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Why Your Debit Card Is Ruining Your Finances

You’re at the store, your cart is full and you’re about to checkout. You open your wallet and have three options for payment: cash, debit or credit, which do you choose? For most people, this decision seems rather inconsequential however making the wrong decision can have repercussions now and into the future which is why, if you chose to spend on debit, you could be ruining your finances!

Let’s face it, if there is one thing people are good at, it’s spending money. Given that life is more expensive these days than ever before, most of us find ourselves in a constant spending spree. We need to buy groceries, pay our bills and even make larger purchases like a car or a home. These are the normal spending habits most of us possess. Then, there are those who spend money for more perverse reasons. They spend money to stay up to date with all the newest electronics, they spend money to show off on social media and they even spend money to soothe the pain they feel when they think about having to go into work the following day. Now, I am not here to judge anyone’s reasons as to why they spend money and the way I see it is that as long as you have the money on hand before you make the purchase then truly things could be worse.

However, if you are going to be spending money, at the very least you should be doing it in the most sensible way possible but unfortunately there are still tons of people who don’t even know the basics of spending the money they’ve worked so hard to earn. Now, before I go into why you probably have the spending habits you do, let’s briefly look at how most people go about paying these days.

Given that more and more people are opting to shop exclusively online rather than actually going into stores, you probably have little clue as to which method of payment people tend to use these days to process their transactions. If I were to ask which method of payment people prefer, I am guessing you would default to debit cards? Did I guess right? When I did my own research on payment methods, I wasn’t surprised to find out that debit transactions make up nearly 50% of all transactions made.

I see it all the time. People walk up to the self-checkout machines, pull out their debit cards and process their transactions and every time I see them do this, I lose a bit more faith in humanity but I will get into that a little later. One interesting point from the studies I read is that while debit transactions made up 50% of all transactions, said transactions were only about 80% of the dollar value of credit card transactions which when you think about it means that people tend to use their debit card for smaller purchases and their credit cards for larger ones. Now, I’m just postulating here but I’d be willing to guess that people use their debit cards for smaller transactions because when you make a debit transaction, the money must already be present in your bank whereas with credit cards, that purchase is another day’s problem and we all know a few people who have yet to understand the responsibility that comes with owning a credit card.

In fact, it’s this lack of responsibility that has prompted the rise in debit card use today. Listen to mainstream financial gurus like Dave Ramsey and they will tell you to cut up your credit cards and that debt is the devil. However, I use credit cards all the time and I have yet to need an exorcism but hey maybe that’s just me. Crummy jokes aside, this mainstream idea that credit cards are harmful to your finances is just one of the reasons that more and more people these days are spending on debit over credit. The other reason more people are opting for this alternate means of plastic when paying is that let’s face it, who spends cash these days? Unless you’re meeting up with your drug dealer, then chances are you seldom pay with cash. In fact, when I think about it, I can’t even recall having the option to pay with cash at many of the stores I frequent. As such, if you are being told not to pay with credit and cash isn’t an appealing option then it’s no surprise as to why the number of debit transactions is on the rise!

Now, you yourself may be a regular debit card user and as such may be wondering what’s so bad about paying with debit. Inherently, there is nothing wrong with paying by debit however by doing so you are missing out on a ton of different financial benefits. I’m going to get into what benefits you’re missing out on in a minute but first, let me share with you the one benefit I do think debit cards have over the two other common forms of payment.

Using a debit card makes a ton of sense for people who have yet to master spending self-control. As I mentioned earlier, we all know someone who can’t handle the responsibility that comes with having a credit card and see it as an all you can spend buffet. Given that you need to have the funds already in the bank to pay on debit, this means that getting yourself in financial trouble is less likely when paying in this way.

Now, if you’re paying attention then you’re probably thinking, but isn’t this the case when paying with cash too? Yes, it is however who wants to have to withdraw money from the bank every week or carry around loose change after making a purchase? Not me! As such, spending on debit offers a responsible means of spending that is ultimately more convenient than paying with cash and as such does have a unique benefit that the two other forms of payment lack. However, this is where the good times end with debit cards because beyond this benefit, there really aren’t any other reasons why you should spend in this way.

As such, let’s now move onto the benefits you’re missing out on by paying with debit over cash or credit.

Forgone Benefits

First, let’s talk about cash. Who doesn’t love cash? I still remember working jobs when I was young and collecting cash and there’s just something about the tactile nature of this form of tender that never loses its flair. Speaking of its tactile nature, it’s this physical form that makes spending with cash a more fiscally responsible way of spending than the debit card you’re presently using. You see, when we hand over our cash, we physically see the money we have depleting and this activates areas of our brain that senses pain and disgust. Generally speaking, this actually causes us to spend less money and if saving is part of your financial game plan, which it should be, then paying with cash may make sense.

Now, as I mentioned before, cash isn’t the perfect payment method. In fact, there really is no perfect way to pay. However, again, when it comes to cash, having to go to the bank to withdraw money regularly or walk around with your pants jingling with changes are less than ideal situations to be in and as such I think that as much as spending with cash trumps paying with debit, they still both lose out to the final form of payment which is with credit cards.

I can already sense a fit of rage coming over Dave Ramsey for me saying this but if you want to get the most amount of benefit out of your spending then you need to be doing so with a credit card. Hands down, credit cards offer the best overall benefits amongst the three spending options we’ve been discussing. In fact, the only downside I can think of with credit cards is the risk of overspending. Fortunately, there’s a simple fix for this issue, don’t spend more money than you have. Case closed.

The Power of Credit

Let’s now move onto the plethora of benefits you gain access to when paying with credit. The first is fraud protection. Let’s face it, some people have such a spending issue that not only do they spend all of their own money but then they want to spend yours too by stealing your card or identity and using it to make purchases. Now, I’ll admit that debit cards do offer fraud protection too but typically it is more limited than what you would receive as protection from your credit card. With debit cards, you must report erroneous charges within the first 48 hours of them being made and still you may be liable for more of said charges than you want to pay. However, with credit cards, typically the most you will be liable for in a fraud situation is $50 therefore when it comes to protecting your money, credit cards do a better job.

Next, let’s talk about cash flow. Most people don’t look at credit cards in this way but when you pay by credit you are essentially taking on a short-term loan. When you make a purchase, you have until the end of the month to pay it off without penalty hence gaining access to a very short-term loan. Now, do I recommend you rely on this form of financing in your day to day life? Of course not. This is how you get into trouble because the rates associated with most credit cards are absolutely punishing. However, if you do find yourself a day or two away from payday and need to buy something now then at least you have the option to pay by credit and sort out your finances later.

Then, there are credit card perks. The credit card business is a competitive one and as such most companies are willing to give you everything but their first-born child in the hopes that you will choose their card over their competitors. These perks include travel points, cashback, warranties, free gifts and the list goes on! One point of caution for those who are already regular users of credit cards, especially those with amazing rewards, is that you need to assess if the rewards from the card you are looking to sign up for are worth the cost of acquiring it.

Many credit cards these days come with some sort of an annual fee in exchange for even more lucrative rewards. For instance, you may get 2% back on your purchases if you sign up for a $100 credit card rather than just 1% with a free card. In this case, you should assess whether you will spend enough to recoup this extra fee based on your typical spending patterns. If we do the math, you can see that you would need to spend over $10,000 a year on your credit card for that extra 1% cash back to make financial sense. Therefore, whenever paying for the privilege of using more lucrative cards, always calculate the breakeven as to when its use falls in your favour.

Finally, let’s talk about the most important reason why you need to ditch your debit card and spend with credit instead. The reason is building credit. When people talk about getting your finances in order, they often talk about creating a budget, saving and investing but no one ever talks about credit.

Given the lack of discussion around it, most people go about their lives blissfully ignorant as to its importance until they go to get a job or buy a home and are suddenly awakened to the importance of having good credit. If you ask me, this lack of awareness stems from the poor education system most of us grow up in where the curriculum prioritizes teaching us the quadratic formula over more useful knowledge like how to build your credit. Well, fortunately for you, class is now in session and this time you are actually going to learn something you can use.

Whether you realize it or not, your credit score impacts many aspects of your life. For example, when you go to apply for a mortgage, your financier will want to see how creditworthy you are before they lend you hundreds of thousands of dollars. Alternatively, your prospective employer may run a credit check on you as part of your application process. Finally, you best believe that all landlords, or ones with half a brain anyways, will ask for credit records before they even think about letting you rent their space. So, given that credit affects not only your ability to earn money but also being able to keep a roof over your head, let’s briefly talk about how using credit cards can help you build an amazing credit score.

As you spend on credit, you start to build what is called a credit history. Kind of like your browser history, it’s a log of all your activity, just in this case, it’s probably much cleaner. As you charge transactions and pay them off in full and on time, you build a record of your creditworthiness and as such your credit score rises over time. This is basically proof that you can manage your money and this is important information for lenders, landlords and employers alike.

Therefore, as you can see, paying with debit, while commonly done, isn’t ideal for those trying to maximize their financial growth. Sure, it’s convenient, but that’s about all it is. So, the next time you’re checking out, reach for your credit card over debit or cash and start to reap all of the benefits this form of payment can offer!

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