Should you ditch your credit cards?

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(MoneyWatch) Some 50 million U.S. households have credit card debt, according to CreditCards.com. About two-thirds of Americans own a credit card, and about half of these folks carry a balance.

But consumers' reliance on credit cards appears to be at a turning point. Some reports suggest that more people are steadily paying down their debts or are even deciding to forgo credit cards altogether. Despite the existence new consumer protections for credit-card users, distrust of card issuers and their gimmicks also remains high. Then there's the other reason -- after a confidence-shaking recession, many people are wary of taking on debt.

For those who are determined to avoid using credit cards, the other payment options include using debit cards, checks, and cash. The number of consumers swiping a debit card to pay for purchases increased over the past two years as a result of the sluggish economy. Almost half of consumers surveyed said they believed debit cards helped control their spending.

It's hard to argue with someone who decides to put aside their credit cards. But if you opt to ditch your card, you should also be aware of the benefits you could be giving up and be prepared to deal with the limitations and risks of using other forms of payment.

Transaction protection: When you make a purchase with a credit card, there is a legal firewall between your bank account and the vendor. The bank issuing the card makes the payment to the vendor. You are obligated to pay the bank only after you agree that the charge is legitimate and that the item or service you bought was delivered as agreed. But make a transaction with a debit card and the payment is immediately deducted from YOUR bank account. Federal laws and bank policies include protections from fraudulent or unauthorized transactions due to debit card theft. But before a questionable transaction is sorted out, the money is taken from your bank account. In the meantime, if your account is depleted, any checks you've written could bounce.

Credit history: Responsible use of credit cards is an effective way to build a good credit score. Consumers who don't carry a credit card have a lower average credit score compared with those with at least one card and who always use it responsibly. The fact is, many folks will need a good credit history when it comes time to buy a house or a car. And you can only get that by responsibly using credit. According to experts, debit cards -- which are simply a card substitute for paying by check -- have zero impact on your credit score.

Convenience: It also can be difficult to rent a car without a credit card. Some hotels may not book a reservation on a debit card, and those that do often place a hold of several hundred dollars, which freezes that money in your bank account. That temporarily lower your available bank account balance, which can cause incoming checks to bounce.

Benefits and rewards: Finally, there are the additional befits and rewards programs that come with credit cards, including frequent-flyer miles, gift-card rewards, college savings, and other programs. Some credit cards provide good rates on foreign currency conversions, so these are a good option to use when traveling in a foreign country. Many credit cards also double the length of a manufacturer's warranty when the item is purchased on the card, making credit cards a good payment option when buying and shipping consumer electronics.

Of course, when folks get into credit card debt and can't promptly pay off their balances, the fees and interest they pay will almost always outweigh these rewards and benefits.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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