How can I get the same protection shopping with a credit card, without using a credit card?

Question

Following the advice of Dave Ramsey, I'm getting rid of my credit cards. The problem is, the alternatives don't seem safe. There are people who stand around the cash machines watching people take out large sums of cash. And there are merchants who have personal scanners who steal card details. It seems safer to use a credit card, because at least my actual bank balance can't be immediately drained.

Is there another way to make card payments that lacks the risk of being without my money if I paid with debit card, but also stops me from running up debt and interest?

Answer 1

Dave Ramsey is well-meaning, but wrong sometimes.

Aren't we all.

What Dave is really saying is "You can't have credit cards because I don't trust you to use them responsibly".

I realize that sounds psychotic as a blanket statement to all humans, but Dave Ramsey understands that the people who listen to Dave Ramsey are a particular class to whom Dave is marketed: Average Regular Folk who are not that great at money, and realistically probably never will become all that great at money. The message makes sense in that context.

The question is: can you be trusted?

If you can use the credit card responsibly, go ahead and have one.

You simply need to follow the Suze Orman rules for credit cards: think before you charge and pay them off in full every month (which eliminates interest).

And by the way, you may already have one: cutting the card is a symbolic act, it doesn't close the account. They'll cheerfully send you another one. They'll also be happy to adjust credit limits if you find that helpful, talk to a human at customer service. (though adjusting upward will require a credit check).

Another option is a secured credit card. This is a normal credit card, however the bank requires you to make a cash deposit equal to your credit limit. If you feel you need the help of a bank to keep you honest, then you can select one of those. Or you can "cook your own" by choosing a credit card from a bank, and opening a savings account with that bank and willingly depositing the amount equal to the credit limit, and then just don't take the money out.

Answer 2

In the United Sates the safest method of paying is with a credit card. There is always a lag of weeks between the usage and the pulling money from the bank account. There are ways to dispute transactions.

Checking the items on the bill before transferring funds to pay the bill will eliminate all penalties if somebody does get a fraudulent transaction into the system.

You will also find that some transactions can't easily be done with a debit card: renting a car. Others may require extra large hold for contingencies: a hotel room.

Answer 3

If you are able to do so, continue to use your credit card, but monitor your use and keep it under control.

I always keep a certain amount on a separate account which is supposed to be seen together with my credit card and which ensures I am never "really" in debt. This includes always paying my card off in full.

Answer 4

In the US (I can't vouch for elsewhere) debit cards are under different regulations than credit cards and are not as safe, but can be used in most places credit cards can be. You do have to maintain a high enough balance in the account behind the debit card to cover all anticipated purchases/holds/whatever.

Personally, I'm perfectly happy continuing to use credit cards and making darned sure I pay them off in full every month, so I never pay interest But if you can't resist the temptation to let payments slide, there are definitely arguments for not having one.

EDIT: Other folks have mentioned one-time credit card numbers, and prepaid cards. I'd add that some banks will let you turn a card on and off via their website or phone app, and a few may now offer the option of doing two-factor authentication on a card. All of these add some security, and may remind you to consider your budget before buying; the prepaid in particular is like taking out a cash withdrawal in that you can find only spend what you've loaded it with.

Answer 5

I was in a similar position at one point, wanting to do what I could to ensure I didn't rack up a bunch of debt. In the U.S. at least, credit cards have protections (and rewards) that other payment types don't, so it's difficult to get the same amount of protection with some other instrument. I did a lot of research and came up with a slightly different solution. Instead of trying to make a debit card (or similar) behave like a credit card, I took a credit card and made it behave like a debit card.

I got rid of my existing credit cards and took out a new card through my primary bank, specifically requesting a relatively low limit (I think I started at $250). Since I got the card through my bank, I could manage it via online banking just like it was any other bank account, viewing balances, transferring funds instantly, etc. Every day, I would check the account and pay off whatever balance was outstanding. If I couldn't pay off that day's balance, I couldn't use the card again until I did. That effectively turned it into a debit card, since any money spent came out of my account almost immediately. As time went on and my financial discipline improved, I could go from checking and paying off the account daily to every other day, then weekly, and eventually to only checking it once per month. After going a year or so of monthly payoffs without carrying any debt forward, I knew I had built enough discipline to handle a normal credit card.

Pros of this technique:

• The card is inherently a credit card, so you get all of a credit card's protections and rewards.
• Unlike a debit card, this method contributes to a positive credit history.
• Easy to manage using the same tools you already use to manage your bank accounts.
• The credit limit is a hard stop that prevents you from overspending and limits the worst-case debt that you can accumulate.
• A low credit limit means you can't make large purchases with the card. The extra hassle of writing a check or withdrawing cash will remind you to really think about whether that purchase is necessary.
• In an emergency, carrying a balance on your credit card for 4-5 days is usually a lot cheaper than overdrawing your debit account and relying on your bank's overdraft protection.
• Banks will sometimes give you better interest rates on credit cards if you also have checking/savings accounts with them that typically have balances at or above the credit limit (less risk for them). If all goes well, the interest rate won't even matter because you won't be carrying any debt long enough to accrue interest.

Cons:

• Credit limit is very low, at least at first. This isn't too severe of a problem if you're paying off the balance daily. Once you graduate to less frequent payoffs, you might want to bump the balance up a little. You probably won't ever be able to pay large expenses (like rent) using this card.
• Requires a degree of discipline to be successful. Building financial discipline is the most important part of this entire exercise, though, so I don't recommend any method that provides technical constraints to avoid debt without requiring any discipline on the part of the user.
• Some credit card rewards (like airline miles) are given based on the balance listed on the monthly statement. Paying off balances before the statement can mean those amounts aren't included in the rewards calculations. On the cards I've seen at least, those that give a flat X% cash back on each purchase were more likely to accrue full rewards regardless of whether the balance was paid early.
• Significantly more difficult if the card isn't from your primary bank. You want to be able to instantly transfer funds from your checking account to pay off the card balance. If the card is from another institution, there's a delay of several days before the payoff shows up and the whole thing gets harder to manage.

I found this technique to be like a bicycle with training wheels. It provided everything I needed to learn how to use a credit card safely and responsibly while preventing me from doing anything too stupid. Poor financial discipline still incurred penalties, but even in the worst case it wasn't something that I couldn't dig myself out of within a couple of months.

Answer 6

PREPAID CREDIT CARD

If your goal is just to protect your bank account by minimizing how frequently you directly access it while also avoiding building up debt and interest on a credit card, you can buy yourself a prepaid credit card.

You can only spend the amount of money you put onto the prepaid credit card and because of that you can't spend money you don't have. It protects your bank account because it has no link to your bank account and you can't go into debt on it like a normal credit card.

Don't lose the card though because the card is worth whatever you put onto it and there's no other way to access that money.

EDIT: Actually, it seems that if your prepaid credit card is stolen it is possible to lock it down and get it re-issued. That means the credit card is not the sole access point to those funds.

Answer 7

Dave Ramsey would tell you that debit cards from MasterCard and Visa offer the same $0 fraud liability protection that credit cards do.

From his website:

What most people don’t realize is that credit companies like Visa or Mastercard protect their debit card purchases too. If you run your debit card as credit when you make a purchase (which may show up as “pending” on your account), you have the exact same protections as a credit card.

He's not wrong in saying this. When you use a MasterCard or Visa (as well as other card brands), you have $0 fraud liability, whether that card is a credit card or a debit card. If a fraudulent transaction comes through, you dispute the transaction, and the bank will give you your money back. A thief using your card in this way has ultimately stolen from the bank, not from you.

However, there is a difference between how credit cards and debit cards work. When a charge is made on a credit card, the amount is borrowed/applied to your credit limit. If a fraudulent charge comes through, it is not a big deal: you dispute the charge, the bank investigates and removes it, and you never have to pay it.

With a debit card, though, charges are removed from your checking account immediately. As a result, a large fraudulent charge can potentially empty your bank account before you realize what has happened, which can result in further problems when you make legitimate purchases. In the end, the charge will be removed (the charge can still be disputed and the bank will give you the money back), but in the mean time if your bank account is empty you will have legitimate bills that need to be paid, possibly incurring overdraft fees or late penalties.

If you want to get rid of credit cards and only use debit cards, there are ways to mitigate the risk. If you keep a fairly large balance in your checking account (you can do this by keeping some or all of your emergency fund in your checking account), then a fraudulent charge is less likely to remove most or all of your balance. Another way to handle the risk is to purchase identity theft insurance (which Dave Ramsey recommends) that can work with the bank to solve the problem and pay for any losses you incur as a result.

Personally, I would describe myself a a fan of Dave Ramsey and have benefited from much of his teaching. However, I do use credit cards on a regular basis, because I see debit cards as too much of a risk for me. I use the credit cards as if they were debit cards: I only purchase things using my credit card that I already have the money for, and when a purchase is made I account for that purchase right away in my budgeting software even before the credit card bill is ultimately due, ensuring that I have the money to pay it in full each month. However, for some people that I know, the temptation for using a credit card irresponsibly is too much, and they are better off not having a credit card.

Answer 8

You can also get something called a Charge Card which works like a Credit Card (with all the consumer protections of one, including being able to charge-back a merchant and usually winning the dispute, the peace of mind that if lost you can easily cancel it with a phone call, etc.) without the line of credit that is typically attached to a credit card. Since banks are no longer making money off the card's APR, these cards typically have a non-zero annual fee to cover the perks they give, but if you choose a card smartly to make use of the perks, you can earn back the value of this annual fee.

A charge card must be paid off at the end of every month in full (some have even more frequent deadlines, weekly or even every few days). It will overdraw your bank account if you don't have enough funds to pay it off. You may still be tempted to use it to pay for something you don't have money for, but the ramifications of doing so are significantly more serious than just high interest.