Some banks, however, offer enhanced liability protection to debit card users, says Bruce McClary, a credit counselor at ClearPoint Credit Counseling Solutions, headquartered in Richmond, Va. For example, a creditor may not hold customers liable for fraudulent charges on their debit card if the dispute is reported within the first two business days. With financial institutions offering competitive features, McClary says consumers should shop before deciding where to open a debit card.
McClary recommends consumers regularly contribute to a savings account so they have an emergency fund in place if their debit card is compromised.
The disadvantages of closing all credit cards. Despite making it easier for some to climb out of debt, there are significant drawbacks to living without a credit card. With fewer avenues to build good credit, consumers may run into trouble when applying for a car loan or a home mortgage.
Woolsey of CreditCards.com says people with little or no credit history look riskier to lenders and may be offered car loans and home mortgages at higher interest rates – or may not qualify at all. "It's almost like having no employment history or having been out of work for a long time," Woolsey says, adding that a lack of credit history impairs your credibility as a trustworthy consumer. Closing a credit card account with no balance won't ding your credit score, but the card history – including any missed payments – will remain on your credit report for about 10 years.
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Moreover, those who don't use credit cards are still targeted by identity thieves. Fraudsters can use the consumer's sensitive information to open a credit card in the victim's name, for example, and accumulate debt on the card. Therefore, credit card-free consumers should check their credit report for errors. Americans are entitled to one free credit report a year at AnnualCreditReport.com. "If you take your eyes off your credit report for too long, you could be missing things that are challenging to repair," McClary says.
One woman's transition from credit to debit. JoAnneh Nagler of Burlingame, Calif., says making the transition from credit to debit-only living was challenging, especially since it was hard for her to admit she was in financial trouble. "I was around $80,000 in credit card debt before I woke up," says Nagler, author of "The Debt-Free Spending Plan." Her husband also had difficulty using credit cards responsibly; the couple divorced, partly due to their problems with credit card debt.
"I had fallen on my face so hard, so many times, that when I gave up my credit cards I was scared to do it because I didn't know how I was going to live without them, but there's never a good time to quit," Nagler says. Fourteen years after the divorce, Nagler and her husband remarried. The couple signed a financial agreement – and had it notarized – swearing off all use of credit cards.
Looking back on how she abused credit, Nagler says, "Other people have parents they can go to for large chunks of change, but that wasn't a possibility for me, so I would say I used credit cards as my sugar daddy."
The bottom line. Credit card-free living can have its ups and downs, but it enables many consumers to be more conscious of their spending, put more earnings into savings and stay out of trouble with creditors.