More on credit cards — do you need one? What is the difference between debit cards and credit cards? Can you survive without a credit card?

First, the difference between debit cards and credit cards. Both card types allow you to make purchases in a store and online. Both offer protection by the issuer (VISA, MasterCard, etc.) that if your card is used fraudulently, you will not be liable IF you report the fraudulent activity immediately.

When you make a purchase with the credit card, the amount will show up on your credit card account but will not be deducted from your bank account until you pay the bill. When you make a purchase with your debit card, the amount of the purchase is immediately deducted from your bank account. Thus, if there is fraudulent activity on your debit card, the funds will come out of your bank account right away. Depending on the bank and how quickly you report the fraudulent activity, you may have to wait several days before the money is returned to your account.

If you check your bank account daily, chances are you will notice the fraudulent activity and you can report it to your bank before it is posted to your account. In that case, the bank should be able to stop the payment for the transaction before the funds are deducted from your account. Usually, a pending transaction will say “MEMO” next to it. Whether you have a debit or a credit card, if your card is used fraudulently, your bank will issue you a new card and you will need to change any automatic transactions to your new card.

The danger with credit cards is that you may overspend and not be able to pay the bill when it is due. If that happens, you may have to pay financing fees and, possibly, late payment fees. With a debit card, since you know the funds will be deducted from your account right away, it’s more difficult to overspend. Of course, you could spend too much on that new outfit and not have enough in your bank account to pay the rent.

Whether it’s a debit card or a credit card, research shows that we tend to spend more when we use plastic. We don’t like to admit it, but we have an emotional attachment to cash. If there’s only $20 in my wallet and the item costs $20, I may not purchase it. But if I’m paying for it with my debit or credit card, I don’t feel the pain of “losing” that $20 and I will buy the item.

A great benefit of using cash is that you have negotiating power, particularly on high ticket items. Credit card processors typically charge businesses 3% to 5% to collect the payment on the card. At a minimum, you should be able to obtain that percentage of discount for using cash, netting the business the same as they would receive if you used plastic.

So, is it possible to go through life without a credit card? It depends. If you make the commitment to live like your grandparents and great-grandparents and never buy anything until you have the money, you can do it. Crystal Paine (Money Saving Mom) and her husband have lived that way. (See her blog here   Dave Ramsey is probably the most famous example of living without credit (

The downside of never having any debt in today’s society is that you will not have a credit score because credit scores are based on how much credit you have and how you manage that credit. So, if you need to get a bank loan, you will need to find a bank that will do the extra work to assess your ability to make the payments on the loan without using a credit score.

Before you rush out and apply for a credit card, ask yourself the purpose of the credit card. If the purpose is for business purchases, assess if you could achieve the same result with a debit card. If your purpose is to earn points for free travel, I suggest that you save the money for the travel instead using your credit card. I have seen folks pay more for an item because they are thinking about the travel rewards. If they consistently paid less with cash and put the difference in savings for the vacation, they would have the money for the travel without the credit card.

As with many decisions, the lesson is to think it through before you act and consider all the possibilities.

Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.

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