We continue to recommend Dave Ramsey’s Financial Peace University as an excellent introduction to getting out of debt so you can begin to save and invest. His advice is best for taking you out of debt to a net worth of $0. His advice after that point is often unwise. Unfortunately, you need to have financial planning expertise to know when he is wrong. That is why we recommend that you seek a new advisor after you dig yourself out of debt.
One of the topics where his advice is unwise is credit security.
Dave Ramsey recommends using cash to pay for everything and, in circumstances where you cannot use cash, he says you should use Debit. What is more, in “Credit vs. Debit: Which is Better? ,” the Ramsey team writes that you should “use debit (or cash) for any purchase you make and never, ever, in any situation, use credit to pay for something.”
Later, in the same article, the team claims that debit cards are “just as safe as credit cards” and what is more “when it comes down to keeping your money secure, the credit versus debit argument still has debit landing on top.” Not only is this claim simply wrong, even Dave Ramsey shyly admits it later in the article.
Debit is not as safe as Credit.
We’ve written about this before in the article “The Only Right Answer To ‘Debit or Credit?’” Others have written about it even more.
Now, one other tip I’ll give you is: I don’t own a debit card. I’ve never owned one. I’ve never allowed my three sons to possess one. Certainly and truly the worst financial tool ever given to the American consumer. So, a long time ago I asked myself a simple question, how would I remove 99.9% of my personal liability. [snaps fingers] Like that. Because I really don’t want to worry about all these things. So I use the safest form of payment that exists on the face of the earth. And that is a credit card, credit card. Visa, MasterCard, American Express, Discover card. Not debit credit, but credit card.
Every day of my life, I spend their money. I don’t spend my money. My money sits in a money market account. It earns interest. Actually nobody knows where it is because it is not exposed to anybody to find it. It’s just sitting there. I go to the dry cleaner, I give them my card. I pick up the groceries, I give them my card. I put fuel in my boat on the weekend, I use my card. I pay the marina to keep my boat in the water all year long, they put the rent on my credit card. I travel all over the world. While I wait to get reimbursed, I use my credit card. If I need euros, I go to the ATM machine and I use my credit card. I’m not gonna use my debit card to get euros overseas or a pounds in Great Britain. And every day I use my card, and then if I pay the bill in full or part of the bill my credit score goes up. So I’m building credit while I’m using that credit card.
And if tomorrow – and I’ll do everything to protect my information – but if tomorrow someone gets my card number and charges $1 million on my credit card by federal law my liability is zero. I have no liability. So yes, I love to shop online. I don’t use a special card, I just use my credit card. If they don’t deliver the merchandise, if they deliver it and it’s broken, if the host side I went to is fictitious to begin with, I have zero liability. When you use your debit card – every time you reach for it – you’re exposing the money in your account. The only person that can get robbed is you. When you use your debit card, you could use it for the next 50 years 20 times a day you will not raise your credit score by that much. [Gestures an inch] And of course when you use your debit card, you are liable up to a certain amount and it takes a while in order to get that debit card fixed. So when we do post investigations and breaches, and we say to someone, “On your incident what happened?” and then answer “Well, I was in Target but I used a Visa card so, nothing, they cancelled my card the next day, two days later FedEx sent me a new card. And that was the last I heard about it.”
“Well, about you?”, and they answer, “I used a debit card there. They took $3,000 out of my checking account. It took me two months to get my money back. While they said they were investigating, I had to pay my rent. I had kids tuition. Everything! I couldn’t pay it because they have my money.”
Using a debit card increases your exposure to fraud. And if that unfortunate event happens, it takes much longer to get reimbursed for the bank’s mistakes.
I experienced this recently, when we reimbursed an employee for expenses using our bank’s bill pay system. This reimbursement check was stolen out of their mailbox and fraudulently cashed. The bank contracted with a bill-pay service that began an “investigation” which took four months to complete. The bank was helpless in dealing with their own bill-pay contractor. We were helpless in getting our money back for four months. And the bill-pay service was more concerned with their legal liabilities over disclosing any information to us during the ordeal than solving the problem.
Ultimately, the money was put back into the account. And although the amount was small, we limit the balance of the account to only the amount of money we are willing to put at risk.
If you are the type of person who will always pay off your credit card, don’t use debit cards and expose your bank account to risk.
If you are the type of person to carry a credit card balance, then avoiding a credit card might be better for you. To those who have already finished Dave Ramsey’s baby step 2 of paying off their credit cards or who have significant assets and require better credit scores, having a credit card may be wiser.
While Dave Ramsey is initially very clear with his advice on Debit cards, stating that “Debit cards are just as safe as credit cards,” he modifies these ideas at the end of his rant against credit cards, writing, “If you do choose to enter your pin number, just know that you don’t have quite the same amount of protection (you’re still covered, just not to the same level). So to ease your fears, run your debit card as credit (and skip the PIN number) and you’ll be good to go!”
Yes indeed, the only correct answer to Debit or Credit is “Credit!”
Photo by Avery Evans on Unsplash