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The title may not be very accurate.

I'm European (Italian) so I don't have a very clear idea of how it works in U.S.

My understanding (correct me if I'm wrong) is that the economy there incentivises the people to use credit cards, and eventually spend money they don't have. Then, each month, they can pay back the debt, paying some interests on it in some cases.

First of all, if this premise is wrong, please explain me where I'm wrong. If the premise is right, even if just generically, I'd like to ask:

Is it possible to live in U.S. and use a debit card rather than a credit card, just like it works in Europe. So that I'm unable to spend more money than what I have on my savings account?

Alternatively, use a credit card but disable the possibility to spend more money than the one I have on my account.

I know credit cards are needed to create a credit score, but I'm not sure I understand the implications of that either.

Brythan
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Fez Vrasta
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    While all the answers are good, no-one has actually questioned your assumptions. The way it works in the US and the way it works in Europe are, for your purposes, identical. So you might just as well ask “Can one live in Europe without a credit card” and the existing answers would all be just as valid. – Vicky Mar 09 '19 at 19:06
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    @Vicky some of the answers pointed out the need of a credit card for hotel reservations. In europe you don't need one to book an hotel, they never put money on hold. So I wouldn't say the situation is the same – Fez Vrasta Mar 09 '19 at 19:15
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    @Vicky Many parts of Europe use a different means of consumer borrowing. Instead of credit cards, people have an overdraft facility on their bank accounts. Essentially their debit card becomes credit. In some places, installment plans ("hire purchase") are much more prevalent. But overall, I agree the OP should note that much of Europe has higher household debt, as a percent of disposable income, than the US. – user71659 Mar 09 '19 at 20:47
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    @FezVrasta you can use a debit card for hotel reservations, you just have to deal with the money being on hold. – CQM Mar 10 '19 at 16:03
  • @CQM I'm aware of that. But from my personal experience it's a nightmare. It happened few times that the hotel put on hold even 3 times the reservation price. It's not acceptable and with a credit card it wouldn't have been a problem – Fez Vrasta Mar 10 '19 at 18:57
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    Comments are not for extended discussion; this conversation has been moved to chat. – GS - Apologise to Monica Mar 11 '19 at 21:00
  • I don't use a credit card - except for business - because in that case I WANT there to be a receipt for taxes. Aside from that I never, ok, almost never, use a credit card. By almost never I mean I go for months without using my personal card. – Mayo Mar 12 '19 at 13:23
  • One difference between Europe and the US is the different levels of security. Chip and Pin isn't widespread in the US, and they still often take your card out of your sight to swipe it. I got a credit card before I went so that any money which was stolen from a cloned card wasn't mine. – thosphor Mar 12 '19 at 15:10

7 Answers7

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My understanding is that the economy there incentivises the people to use credit cards, and eventually spend money they don't have.

Interest on debt provides a direct incentive to only spend money you have, but there is incentive to use credit cards in general as they provide a buffer between your money and fraudulent charges as well as commonly having some sort of reward program. Many people do fall into a trap of spending more than they should because they have access to credit, which ends up costing them much more over time due to interest.

Is it possible to live in U.S. and use a debit card rather than a credit card, just like it works in Europe. So that I'm unable to spend more money than what I have on my savings account?

Credit cards are very common in the US, but ~25-30% of consumers do not have any. Most debit cards in the US use the same transaction processing companies as credit cards (Visa/Mastercard/etc.), so living with debit cards instead of credit cards is typically not an issue.

The main issue you'd likely encounter when using a debit card instead of a credit card in the US is with things like hotel reservations and car rentals where the merchant will place a hold for some amount that will be released when the final transaction is processed. With a credit card, you'd never see this unless you were pushing up against your credit limit, with a debit card however you need to have funds in the account sufficient enough for holds and any actual charges. Not a huge issue typically, but it's important to have plenty of funds in your account when traveling on a debit card.

Hart CO
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38

Is it possible to live in U.S. and use a debit card rather than a credit card, just like it works in Europe. So that I'm unable to spend more money than what I have on my savings account?

Yes. My son did it for quite a while.

There are things you can't do, though, like rent a car. And reserving a hotel will require a large balance in your checking account because they will put a very large (like US$1500) hold on your account to ensure you have enough money to pay them.

the economy there incentivises the people to use credit cards, and eventually spend money they don't have.

Advertisers try to convince you to spend, spend, spend. The antidotes are to #1 be disciplined and #2 not watch advertisements.

I know credit cards are needed to create a credit score, but I'm not use I understand the implications.

They make it easy to start a credit history, but aren't mandatory.

Many -- but not all -- apartment owners won't rent to someone without a credit score, but it's been a long time since I've had to rent, so I don't know how prevalent it is.

BOTTOM LINE: credit cards don't force you to go into debt. I went for a few years heavily using my CC every month, and had no debt because I paid the card off every week. Essentially, I used it as a debit card. Why didn't I just use a DC? Rewards points (which you probably won't get), and fraud protection.

So, if you can be disciplined, then get/use a CC. Not everyone can be. For a long time, my ex-wife and I weren't but now we are.

user2357112
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RonJohn
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    You can definitely rent a car, reserve a hotel, etc using a debit card. – gwar9 Mar 10 '19 at 03:31
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    OP didn't assert CC forces them into debt. They used the word 'incentivises' and humbly admitted they are susceptible to that. – kubanczyk Mar 10 '19 at 08:06
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    @kubanczyk I re-read the Q, but don't see where OP admitted that they are susceptible to over spending. – RonJohn Mar 10 '19 at 12:30
  • I've booked numerous hotels with a debit card in the US over the last couple of years, all through hotels.com/Expedia. None put any sort of amount on hold on the card. Only when I made a short visit to Canada did I actually get a hold put on my card, and that was only $100 (about $77 USD) which cleared at checkout. – Michael Hampton Mar 10 '19 at 18:08
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    A lot depends on your liquidity as well. For example, most apartment owners require a credit score in order to verify that you are not deeply in debt and/or irresponsible. You can usually reduce the risk to the owner by simply paying a double deposit. – Sigma - check out Codidact Mar 10 '19 at 20:40
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    Many -- but not all -- apartment owners won't rent to someone without a credit score, but it's been a long time since I've had to rent, so I don't know how prevalent it is. — wouldn't the alternative to renting (owning) be even harder without a credit score, unless you're wealthy enough to buy a place to live outright? – gerrit Mar 11 '19 at 09:53
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    Its also safer to make online purchases only with a CC, as US laws allow you to contest charges you disagree with (particularly important if someone steals the online retailers' database of CC numbers). – T.E.D. Mar 11 '19 at 15:01
  • IIRC, on my fresh start my Internet-based bank let me have a Secured Credit card and have not an abstract "Rewards points" but they outright returned 1%-2% of the spendings back to me. That was totally worth it. BTW find a friend with similar card, they will refer you for extra cash reward for you and them. – Victor Sergienko Mar 12 '19 at 18:19
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Just to add to the other answers, I would point out some statistics on the use of debit cards vs. credit cards: most non-cash payments in the United States are made using debit cards:

enter image description here

image source

Image transcript:

Number of non-cash payments made in 2015 and their values

Note: debit card includes non-prepaid debit, general-purpose prepaid, private-label prepaid, and electronic benefit transfer. Credit card includes general purpose and private label. Check, automated clearinghouse (ACH) credit transfers, and ACH debit transfers include interbank and on-us.

Source: The Federal Reserve Payments Study 2016 --- Creditcards.com

Here is a survey a 2017 survey in which payment processor TSYS asked over 1,000 consumers which payment form they prefer. 44% chose debit cards, while 33% selected credit card:

enter image description here

Community
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Franck Dernoncourt
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    From your pyramids, can you explain what "ACH Credit Transfer" and "ACH Debit Transfer" are and how they relate to "Debit Cards" and "Credit Cards"? – Astor Florida Mar 10 '19 at 00:13
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    @axsvl77: ACH transfers are electronic movement of money directly from one bank account to another. An ACH credit transfer is where the entity initiating the transaction "pushes" money into another account; a common case is direct deposit of paychecks. An ACH debit transfer is where the initiating party "pulls" funds out of another account; a common case is automatic debits set up to pay bills. – BrenBarn Mar 10 '19 at 01:26
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    ACH is a peculiar US isnstitution called "Automated Clearing House" which seems to exist to slow the electronic transfer of funds. – Jasen Mar 10 '19 at 06:59
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    @Jasen No, all European countries have similar schemes, though they are largely national. UK's is called Bacs, Sweden is Autogiro. The EU-wide effort to unify the schemes is called SEPA Instant Payments. – user71659 Mar 10 '19 at 17:59
  • In general, certainly within the UK, BACS is mainly redundant, with Faster Payments (generally instant) having taken its place. – ThomasRedstone Mar 11 '19 at 00:04
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    Not sure why ACH is mixed in with CC/DB/cheques... I would guess ACH is mainly salary payments, mortgage payments, loan payments etc. - i.e. the bulk payments everyone send/receives once per month. This accounts for the very high value. On the other hand CC/DB/cheques represents the day-to-day retail spend; new shoes, restaurants, supermarket, etc. So I think the chart is mixing apples and oranges. – Oscar Bravo Mar 11 '19 at 07:07
  • @gerrit - from the explanation above, that would be an ACH debit transfer. – Martin Bonner supports Monica Mar 11 '19 at 11:27
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    @OscarBravo People rarely use checks in stores in the US anymore, and even then, the majority will convert the paper check to an electronic ACH transaction. Same thing with paying bills, they are usually converted. Checks that clear as checks are largely for paying rent and business-to-business transactions. I fail to see your point about this mixing. – user71659 Mar 11 '19 at 16:41
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    @user71659 Maybe I misunderstood the question - I thought it was about retail spending (supermarkets/restaurants/shoe shops). Clearly all the big spends in life go directly from account to account via the bank (ACH), but retail spending hardly ever does. – Oscar Bravo Mar 12 '19 at 07:13
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    @OscarBravo: The bottom of the chart is indeed irrelevant to the question, but I think Frank showed it for the purpose of comparing the top two categories, namely debit versus credit cards. That's relevant. – hmakholm left over Monica Mar 12 '19 at 08:34
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Is it possible to live in U.S. and use a debit card rather than a credit card, just like it works in Europe. So that I'm unable to spend more money than what I have on my savings account?

Yes, it is completely possible. Dave Ramsey advocates for this on his national finance radio show. There are millions of people doing this already!

Alternatively, use a credit card but disable the possibility to spend more money than the one I have on my account.

These are called secured cards. Essentially you open a bank account and put money into it, say $1000, then the bank issues you a card with a $1000 limit. If you don't pay, the bank uses the account balance to pay it off.

The main reason people in America use credit cards over debit cards are

  1. Any thief that get a hold of it can clean out your bank account. Now rent, mortgage, car payment, etc can't be paid until it gets straightened out.
  2. Debit cards have overdraft fees if you don't have money in your account. If you don't have money, the bank will charge you an overdraft fee, $20 seems common. The barista at your favorite coffee shop may run your card 2 or 3 times to make sure it doesn't work, so $20*3 = $60 you don't have
  3. It's more difficult to reserve cars and hotels since a debit card hold = money missing from your account
  4. Secured cards are surprisingly popular, and essentially mean that even the most debt aversed person can have a credit card.
  5. Most credit cards offer airline miles, cash-back, points, or other incentives for spending on them. You're essentially turning away free money.

EDIT:

In the U.S. a debit card can be run as a credit card, which here means swipe + signature (not a PIN). If you use a debit card at a sit-down restaurant the server will run it as a credit card and bring you a check to sign. Same if you buy online, you can use your debit card as a credit card and no PIN is required.

It's only been recently that the U.S. has (mostly) moved to chip (EMV) protected credit cards due to a rash of data breaches. The U.S. simply doesn't have the protection around card transactions that Europe has.

Even with significant nudging from lawmakers to use the more secure chip cards, some places still just want a swipe + signature (very insecure). As of Oct 1, 2015 if a merchant doesn't use a chip card, they cannot claim a fraudulent transaction and must eat the loss themselves.

RonJohn
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sevensevens
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    Can you please elaborate a bit on the number 1? I mean how would that actually work? Here in Europe, you'd need the PIN for use of ATMs, and it's in general not so easy to impersonate someone in a bank and get money that way. I don't see any other way a debit card could be used to get the money out of an account. – AndrejaKo Mar 09 '19 at 20:58
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    @AndrejaKo Not all transactions require pin in US, online orders, for example where the card is not physically present. While covered against fraudulent purchases, it could take time to resolve, leaving you temporarily without funds. – Hart CO Mar 09 '19 at 22:00
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    @AndrejaKo also, a lot of debit cards in the US can be scanned as credit cards (scan/insert + signature) rather than debit cards (scan/insert + PIN) – Stephen S Mar 09 '19 at 22:27
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    Overdraft fees are probably closer to $35 than $20. You don't get charged one unless the bank actually honors the charge that puts you negative (so running a card more than once to check it won't create more than one overdraft charge). Still expensive and pointless. – nomen Mar 10 '19 at 05:12
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    NB: To get a $1000 secured "credit card" in Canada, I had to secure $1250. The only reasons I had one was (1) to rent cars, and (2) to build a credit score. – gerrit Mar 11 '19 at 09:56
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You can easily live without a credit card in the US, but you might not do yourself a favor:

  • not using the benefits of credit cards if you could is a loss for you - no free flights, cash back, etc.
  • debit cards - contrary to Europe - offer little to no protection, every skimmer will empty your bank account and you are on your own with the problem.
  • you can't secure hotel bookings and rental cars without parking and locking hundreds or thousands in your account
  • with credit cards, you can revoke any fraud charge, no problems, and you never pay the frauded money, not even temporarily
  • many people manage to pay their credit cards off fully every month, and never pay a cent of interest. That takes a bit of your personal willpower, though, and yes, many others don't have that, and end up overspending and bleeding interest for the rest of their life.
Aganju
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    When you say that "debit cards... offer little to no protection", are US-issued debit cards any different in their security from European debit cards? – svavil Mar 09 '19 at 20:38
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    "debit cards... offer little to no protection" is simply incorrect. There are legal liability limits but most banks will extend the protections to $0. On top of that, debit cards have some daily limit imposed by the bank, as well as the usual anti-fraud algorithms, so "emptying out" will not happen. – user71659 Mar 09 '19 at 21:05
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    @user71659 , the problem is that you are out of the money while your fraud complaint gets processed. It can take weeks to get your money back, all the time your account is empty, and all charges fail (producing fat fees). Try it, if you don't believe it. – Aganju Mar 09 '19 at 21:40
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    @Aganju Incorrect again. In the case of any reasonable dispute, banks will issue a provisional credit until the complaint is resolved. Been there, done that. This is no different from credit cards, the provisional credit for a fraudulent transaction there suspends your requirement to pay for it. – user71659 Mar 09 '19 at 23:27
  • well the internet says different; fist match in Google: https://www.google.com/amp/s/amp.businessinsider.com/debit-cards-are-the-riskiest-form-of-payment-2012-1 - scroll down a bit. There are hundreds of sources that all say the same. – Aganju Mar 10 '19 at 00:47
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    @Aganju Pages that earn huge commissions from credit card signups... why am I not surprised? Moral of the story: don't trust things on the Internet. – user71659 Mar 10 '19 at 01:54
  • @user71659 don't trust things on the Internet Ah yes... as said by Abraham Lincoln. – Oscar Bravo Mar 11 '19 at 07:09
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    @user71659 Whether a bank will issue a provisional credit (and for how much) is a matter of bank policy and will vary. I learned this one the hard way. Your protections for credit cards are a matter of law, which is why they're considered to have stronger protections. – bta Mar 11 '19 at 16:54
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    @user71659 I recently answered a related question. Key point "the maximum liability a credit user has is $50. The maximum liability a debit card user can be unlimited" with a citation of a Federal Trade Commission link within https://money.stackexchange.com/questions/105892/is-a-debit-card-dangerous-for-an-account-with-low-balance-and-no-overdraft-prote/105910#105910 – user662852 Mar 11 '19 at 19:02
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    @user662852 The provision for unlimited liability is exactly the same for credit. Read 12 CFR §1026.13(b), the credit card issuer has to receive a billing error notice within 60 days after the statement with the fraud. – user71659 Mar 11 '19 at 19:15
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    Hey userXXXX'es, can you please get some distinct usernames? It would make it easier to follow the conversation, and makes a good impression too. – Dan Dascalescu Mar 12 '19 at 10:22
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An option that combines the benefits of credit cards without the temptation of credit lines is the charge card. A charge card works similarly to a credit card except you must pay new charges entirely every month. You are not allowed to carry any balance over, under penalties of reporting to credit agencies and termination of the account.

The only consumer charge cards remaining in the US are from American Express, who also has credit cards. However, unlike Europe, there is relatively wide acceptance of AMEX. In the travel industry, including hotels and rental cars, acceptance is virtually guaranteed.

These charge cards are preferred by affluent consumers who pay their balances in full anyway. (Some corporate cards are actually charge because it is not expected that a large company will carry a balance)

user71659
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    Note that Amex is by far the least accepted general-use card (does Diners Club still exist?), because it's fees are so high. – RonJohn Mar 10 '19 at 14:22
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    @RonJohn The only places where it's consistently not accepted is government and utilities. Otherwise, it's almost always accepted. On the consumer side, Amex has the best customer service and most ethical billing practices (i.e. they keep the due date the same, they seem to let you get away paying a day late). Because of this, they consistently have the best customer satisfaction. – user71659 Mar 10 '19 at 17:26
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"Can one live in the U.S. and not use a credit card?" "Is it possible to live in U.S. and use a debit card rather than a credit card, just like it works in Europe. So that I'm unable to spend more money than what I have on my savings account?"

Yes, that is just what my son who recently graduated and entered the workfoce is doing.

"I know credit cards are needed to create a credit score, but I'm not sure I understand the implications of that either."

That is not the only method. One can also take out a car loan and pay it off regularly, which he is also doing.

He does have a credit card with a lowish dollar limit to book hotels and airfare for the few times he has taken a trip, and then paid off when he got the bill. Some things you just can't avoid having to use a CC.

CrossRoads
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  • "One can also take out a car loan and pay it off regularly" I would challenge this advice. I lived in the US for three years. I never applied for a credit card, but when I went to get a car loan (2 years in) I could not get one. No reputable company would lend me money. Also you say "Yes you can live without a CC" and then in your last paragraph you say that you can't avoid having one... – Mark Henderson Mar 11 '19 at 20:49
  • Car loan, my son had no trouble getting one right out of college. Maybe being a US citizen, your reply reads as if you are not. If one didn't need to travel via plane and reserve rooms at hotels, then a CC would not be needed. I don't have experience with non-citizens getting CCs except for co-workers from the UK back in the 80s who did not have trouble getting theirs; being full time engineers with whatever work visa they were employed under probably helped. – CrossRoads Mar 12 '19 at 00:32
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    I, like the OP, am indeed not a US citizen. Almost all the credit building advice I received was only valid for people who are citizens or have green cards, and that's where the "get a car loan" advice comes from. I was able to get an American Express for the times when I needed to rent a car/book a hotel (but as others have pointed out, an Amex is not a credit card). Also it was nigh impossible to find someone who would rent me a house. – Mark Henderson Mar 12 '19 at 00:36