Credit Card or Debit Card

One very often discussed topics in personal finance discussion is whether to use a credit card or debit card. Here is how I handle my cards.

I have 4 credit cards Chase Freedom, American Express Gold, Citi Bank select platinum and Bank of America American Express platinum, also, I have BOF Visa Debit card. I seldom use debit card, as they do not give cash back or rewards. I did have ‘Auto Pay’ set up on all of credit cards where the entire monthly balance, what they call Total outstanding balance is deducted from my checking account, before they start accruing fees and interests. I do not have to remember to pay off the cards.

The other reason I keep 4 credit cards is I can build up my credit score by using them and paying the dues on time. When I first reached US, banks refused me to have any credit cards due to lack of credit history, I started with BofA secured card. Since then I applied for a new credit card each year. In 2005 I got my first secured card, 2006 got me my Citi card, 2007 I applied and got Chase Freedom. In 2008 I got an offer from BofA to convert secured card to BofA – American express credit card, which I gladly accepted.

During 2009 I called up service desks every 6 months and requested for credit line increase. I applied for American Express Gold card and granted the golden plastic. In 2011 after first round of calls to all 4 banks I have total credit limit more than 30K with AMEX Gold card has no limit. Credit scores did take a few hits during this process, but eventually they do have greater weight-age on credit utilization ratio which lowers when credit limit increases , provided you keep your monthly balance same. I do enroll for credit monitoring service and always cancel after seeing my credit scores, I use all 4 of my credit card companies, so I get to see my credit score four times a year.

All those hard credit inquiries I do to open a credit card and increase credit line, tend to lower my credit score, but the effect stays for only 1 year or so. I steadily increased my credit score from 500 something to 770 in last 5 years just by using credit cards effectively, I do not have auto loan or mortgage as yet. I plan on to buy home in 2012 so I stopped making any more calls to card companies services.

Since I have auto pay set up on all credit card accounts, I do not pay any interest, I do not pay any fees, but I definitely keep the reward points and use it for cash back. Chase freedom card is definitely my trusted companion for this purpose and in last 5 years I received almost 1.5K in cash back.Unlike other personal finance blog writers, I never was in debt. I will post the comparison between my credit cards in future blogs, do read this space.

Credit cards have another benefit to offer, all charges are protected against fraud, once I reserved a movie ticket with my Chase but before the date of the screening there was a fraud detected and Chase re issued the card. At theater, they didn’t accept my earlier booking as the card number wasn’t matching, I had to buy another pair of tickets. In the same night I got the previous booking charge reverted by Chase help desk. You won’t get this service from a debit card. If you lose a debit card, you can lose entire checking account balance.

Do remember to set up automatic payment of entire balance amount with your card issuer, or else you will be in credit trap. If you like reading my posts, do leave a comment.