Credit Cards vs. Debit Cards: Is the Pain of Spending Any Different?

Dave Ramsey recommends using a debit card for all purchases, which in Canada is as simple as tapping your card. But is that really any different psychologically than tapping a credit card? A $10 burger is still a $10 burger, whether you pay immediately or 30 days later. I would argue that the pain of spending is identical at the cash register. If you did an MRI scan, the brain’s reaction would likely be the same.

The Psychological Impact of Credit Cards

For some, however, the pain of spending doesn’t register immediately. Many people don’t fully understand how credit cards work when they first get one, thinking it’s free money or that it functions just like a debit card. For these individuals, the pain isn’t felt until they receive their credit card statement. It’s like eating candy without knowing about cavities—sweet at first, but the bill (like a sudden toothache) delivers the painful reality of interest charges and debt. However, if you treat a credit card like a debit card and always pay in full, the pain of spending remains the same—you feel the loss at the register, just like someone using a debit card.

Credit Card Misconceptions

There’s a lack of education around credit cards, leading to common misconceptions:

1. Carrying a balance improves your credit score. In reality, paying your full balance on time is best. Carrying a balance only results in interest charges and does not help your score.

2. Credit cards are free money. In reality, credit cards must be paid back in full. If not, interest rates (often 20%+) can make purchases much more expensive.

3. The minimum payment is enough. In reality, paying only the minimum means you’ll be stuck in debt for years due to compounding interest. Always pay the full statement balance.

4. I was approved for a $5,000 limit, so I can spend that much. In reality, using too much of your limit (high credit utilization) can hurt your score. Try to keep spending below 30% of your limit.

5. Closing a credit card helps my credit score. In reality, closing a card can lower your score because it reduces your credit history length and increases your credit utilization ratio.

6. All credit cards have the same benefits. In reality, different cards offer cash back, travel rewards, or low interest rates. Choosing the right card depends on your spending habits.

The Case for Debit Cards

Dave Ramsey advocates for debit cards because they eliminate the risk of debt due to bad financial decisions. The lowest you can go with a debit card is zero, but with credit, you can dip far below zero, especially if you have multiple cards with high limits. Since Dave Ramsey speaks to a broad audience, many of whom struggle with money management, it’s safer for him to say “avoid credit cards” than to risk encouraging people to use them irresponsibly.

It’s similar to alcohol—not everyone can handle it in moderation, and for some, it becomes destructive. Around 47% of people carry a balance on their credit card, meaning nearly half the population should not have a credit card. How do you know if you can handle a credit card? If you carry any balance, even once, then no—you should take out your credit card, cut it up, and switch to debit. Just like admitting to a drinking problem, admitting you can’t handle credit requires self-awareness.

Credit Card Costs and Benefits

Credit cards come at a cost—to vendors. Businesses like Walmart and McDonald’s pay around 3% per transaction in credit card fees. But they don’t absorb this cost; they pass it along by raising prices. This means everyone is paying these fees whether they use credit or not.

However, credit card users can offset these costs with rewards. Many credit cards offer 1-3% cash back or equivalent points. If you pay with debit, you’re effectively subsidizing those who pay with credit and earn rewards. Imagine if you had a special card that gave you a 2% discount on everything you bought—that’s what a cash-back credit card does. Over a lifetime, an average Canadian using a credit card responsibly could earn between $33,750 and $54,000 in cash back rewards. That’s nearly half the 5% GST everyone complains about. If you can handle a credit card responsibly, not using it is leaving money on the table (assuming you have a rewards credit card).

The Case Against Using Cash

Dave Ramsey also promotes using cash, but in today’s world, that’s impractical. Loose change often goes unused, rolling coins costs money, and carrying large amounts of cash is inconvenient. While the envelope budgeting strategy (allocating physical cash to spending categories) can help those struggling with discipline, for most people, it’s an unnecessary hassle.

The Envelope Strategy

This method involves taking out all the cash you plan to spend for the month and dividing it into labeled envelopes (e.g., groceries, entertainment). Once an envelope is empty, you’re done spending in that category until next month. It creates a physical barrier to prevent overspending—if you don’t have the cash, you can’t spend it. While effective for some, digital tools like budgeting apps can achieve the same results without the drawbacks of handling cash.

Conclusion: Credit vs. Debit—Which is Right for You?

Credit cards and debit cards both serve a purpose, but they aren’t equally beneficial for everyone. If you are financially disciplined, using a credit card responsibly earns you rewards and protections that debit cards don’t offer. However, if you struggle with spending and carry a balance, switching to a debit card is the better choice. The key is self-awareness—knowing your own financial habits will determine which payment method works best for you.

If you found this helpful and would like help budgeting or investing please email me at taylormckeecoaching@gmail.com