Recession Economics: Debit vs. Credit

There's an interesting article out of the Washington Post showing that people are using their debit cards far more often than credit cards due to the current financial downturn. It seems not so long ago there were cries and worry about the opposite approach--people overusing credit cards because they didn't have enough cash on hand to get by otherwise. Credit cards 101 says that as soon as you start putting groceries or other necessities on credit, you've got to take a good, hard look at your spending habits.

Nonetheless, there are likely still a large number of people who are living on credit right now. Given the bad employment numbers, there are some who absolutely need to spend on credit, even if it's not advisable. But as pointed out by the article, people are being more fiscally responsible during the recession, which is good news for consumers (though not necessarily for retailers).

The article says, "Worry about jobs, fear of fluctuating interest rates on credit cards and wariness about spending too much are contributing to the change." Add to that a greater knowledge about how loans can be a big financial risk (see: the subprime mortgage industry). There have been countless articles written about how going into debt can be a real financial burden. Plainly, people don't trust banks or other lenders to be forthright about what they're charging or if rates can go up in the future. The easiest way out is to avoid credit debt entirely.

That said, there are some advantages with credit that you don't get with debit cards. These are:

1. More consumer protection: If you buy something that is defective and the merchant refuses to issue a refund, you can take this up with your credit card company and potentially get the money back. Because this money isn't paid out yet--unlike debit--this is not yet lost money.

2. Protection against fraud: If someone steals your debit card and goes on a spending spree it is much harder to get this money back--especially if you notice the theft 60 days after the purchase. There is more enhanced fraud protection with credit cards.

3. Rewards points: If you play your cards right (bad joke), you can earn money on the money you spend and not go into debt--if, and only if, you pay your credit card in full at the end of every month.

4. The ability to buy things you can't necessarily afford in the short term: Some would call this a disadvantage, but it can also be necessary, as might be the case with expensive car repairs.

There are also advantages to be had by going the "pay as you go" debit card route:

1. No debt. Every dollar is accounted for so it's easier to set a budget and potentially save money.

2. Ensures that you don't live above your means; you can only spend what you have.

3. No fees/rising interest rates/changes in policy/etc. These problems can be out of sight, out of mind.

Many people use a mixture of debit and credit--using credit for "rainy day" expenses (like the aforementioned car repairs). Some still live above their means using credit--a sort-of reckless, live-for-the-moment approach to spending, which may be more fun, but it's not entirely responsible. And some have cut their credit cards in half. What about you? Have you stopped spending on credit cards or are they still a guilty pleasure?