For many years, popular personal finance teaching, especially in churches, has steered people away from credit cards and toward debit cards. But recent credit and debit card data breaches, such as the massive one experienced by Target shoppers, shows why credit cards may be the better way to pay with plastic.

The argument for debit cards

Debit card proponents come from a “save yourself from yourself” perspective. They point out that you can’t get too reckless with a debit card since its pulling real money from your checking account. With credit cards in your wallet, they worry that you may head to the store for milk and eggs only to come home with a new bass boat!

With a credit limit far exceeding the balance most people keep in their checking account, they argue that carrying a credit card is like walking around with a stick of dynamite in your wallet. There’s no telling when that thing might go off, blowing up your financial life and probably taking your marriage with it.

The argument for credit cards

The Target mess, and similar ones at other retailers, made a lot of people rethink their use of plastic. Hopefully, it reminded people of one very important difference between debit and credit cards.

If someone buys something fraudulently with your debit card, that money has been pulled from your checking account. Now, your recovery efforts are all about getting your bank to put the money back. While many debit card issuers have zero-liability policies (as long as you sign for your purchases instead of using your PIN), banks have up to 10 days to investigate fraudulent debit card use. In the meantime, your lower account balance may leave you bouncing checks.

By contrast, if someone buys something fraudulently with your credit card, that money has not been pulled from your checking account. Instead, it shows up on your bill, giving you time to contact your card issuer and make sure you don’t have to pay for that item.

Credit card rules of the road

To be sure, there are some people who would be better off not using credit cards. The temptation to overspend really is too much. However, I believe many people (and most SMI readers) are capable of using credit cards responsibly. Here are four “rules” that help.

First, use a credit card only for pre-planned purchases. If your cash flow plan (a.k.a. your “budget”) says you can spend $100 on clothing each month, you are free to use a credit card to buy $100 of clothing each month. Of course, this assumes you have a cash flow plan. I would go so far as saying if you don’t use a cash flow plan, don’t use credit cards.

Second, record your credit card spending right away. If you’re using an electronic cash flow tracking system, such as, it’ll do this for you. If you’re using a paper & pencil tracking system or some other manual process, record your spending on the day you make each credit card purchase, even though the bill won’t show up for several weeks. Today’s credit card purchase counts against this month’s budget.

This is one of the most important ways to avoid overspending with a credit card. Too many people wait until the bill arrives, which often prompts them to think the credit card company made a mistake (“I couldn’t possibly have spent that much!”), only to find out they really did make all those purchases.

Third, pay your bill in full each month.

And last, if you can’t follow rules one through three, don’t use credit cards.

Heretical teaching?

In our household, we only use a debit card when depositing checks or getting cash. For all other plastic-related transactions, we use credit cards.

Saying that feels like revealing a deep, dark secret. The teaching against credit cards and in favor of debit cards, especially in church circles, has become so visible and impassioned that it’s easy to assume it must come straight from the pages of Scripture. But it doesn’t. God’s Word teaches us to be wise. In today’s environment of frequent data thefts, if you’re going to use plastic, I believe using credit cards is wiser than using debit cards.

What about you? Which form of plastic do you prefer and why?