On Friday, I shared an anecdote about a woman with (at least) 30 credit cards in her wallet, and I talked a bit about the cards that I carry in my wallet. I also asked you guys to share details about your situation, and the general consensus seemed to be that most of you carry somewhere between 2-4 credit cards.

There were, of course, several readers who don't use credit cards at all, and I think that's great. In personal finance, as in other areas of your life, it's important to do what works for you. That being said, a reader named Dave left a comment that just left me shaking my head:

I do not have any credit cards because I do not spend more than I make. If I buy clothes with my debit card then it would cost me $100 bucks, but with a credit card it would cost me $100 plus $10 interest.

Based on the above, it seems that Dave doesn't fully understand how credit cards work. Either that, or he was trying to be dramatic. Regardless, there are some important issues here, so let's dig in…

For starters, I couldn't agree more with the “spend less than you earn” mantra. Credit cards most definitely give you the opportunity to over-extend yourself, so you need to be careful. At the same time, however, just because you use a credit card doesn't mean you're living beyond your means.

As for me, I like using credit cards because: (1) they're convenient, (2) they provide me with what is essentially an auto-generated spending report (the bill), and (3) assuming that you choose wisely, there are some fairly generous credit card reward programs out there. While you can capture #1 and (to a certain extent) #2 with a debit card, my experience has been that debit card rewards pale in comparison.

Another non-trivial concern with debit cards relates to fraud protection. While debit cards carry many of the same protections as credit cards, fraudulent activity typically results in an investigation before the questionable charges are eventually reversed, during which time your bank balance might be tied up. But I digress…

Of course, these benefits will be swamped out by interest charges if you don't pay your balance in full every month. The answer here is simple - don't carry a balance. Despite Dave's concerns about paying more with credit, that's only true if you don't pay your bill in full and on time. Assuming that you have the money in the bank, you don't have much to fear here.

But… Even if you're not carrying a balance, it's possible that you're spending more than you might otherwise spend thanks to your credit cards. In fact, it's been argued that the average credit card user spend more than those who use cash. And what good are 1-5% rewards if you're spending 20% more thanks to that piece of plastic in your pocket?

If you're a credit card user and you're unsure about how they affect your behavior, then I suggest running an experiment. Closely track your spending for a month (or two or three) with a credit card in your wallet. Next, throw your credit cards in your sock drawer and repeat.

Did you spend more with your credit cards than without?* I'd be willing to bet that, in many cases, the will (over the long run) be fairly similar if you simply replace your credit card with a debit card. Sure, the transition to a debit card will help to reign in the most egregious over-spenders because they won't have the necessary bank balance to support their spending, but it may not do as much for everyone else.

If you really want to modify your spending behavior, you might want to try banishing your cards entirely - including your debit card. In this case, I have little doubt that your spending will decline, primarily due to the huge inconvenience associated with navigating the modern world without plastic. If you lead an entirely local life, this might be an option for you. But if you shop online, travel, etc. then this probably isn't an option.

As for me, I'm comfortable with our spending levels and unwilling to forego the convenience of carrying a card. On top of that, I'm confident that we have the discipline to keep our spending in check, so I'm not particularly concerned about the credit vs. debit debate when it comes to spending patterns.

Given the above, along with the differences in fraud protection (at least as it relates to your balance getting tied up while the charges get sorted out) and the availability of more generous reward programs, I'm not planning on ditching our credit cards anytime soon.

*Note: If you end up trying this experiment, please send me the details. I'd love to hear how it worked for you, and/or to share the results with other FCN readers.

The original article can be found at FiveCentNickel.com:
Credit vs. Debit: Your Cards Don't Have to Be Costly