Credit cards, in the hands of inexperienced people, are very dangerous things. All credit cards are bad credit cards when they're used for the wrong reasons. Debit cards, on the other hand, are simply used as a means for purchasing products without using cash and when using cash isn't an acceptable method of payment.

Applying for Credit Cards

I have known people over the years who applied for credit cards from banks and department stores for apparently no reason at all. They had reasons, as I discovered, and those reasons were some of the craziest reasons I've ever known. I won't even try to mention them all.

I knew several people who applied for credit cards because the banks or stores were offering gifts for applying. I think I can understand doing something like that if you don't have much left over when following a monthly budget. A new toaster or electric can opener might come in handy. It's still dangerous, though, especially when that credit is approved.

Most of the people I've known, however, apply for these credit cards so they can obtain things that they could never save up enough money to buy outright. This is probably the largest sector of credit users in the US. Unfortunately, most of these same people don't know how to maintain a monthly budget to begin with. At least half of them could afford to pay for things outright if they even had the slightest idea of what the word "wait" means. Waiting until you've saved enough to buy what you want or need will save you a fortune in the long run.

Here's what ends up happening to people like that. With all the interest and finance charges tacked onto what they actually borrow using the credit cards, they end up paying much more than they ever borrowed. Coupled with late charges, most people end up spending most of their paychecks paying off a "dead horse" — they're still paying for something they don't even have in their possession anymore. Some of them even use them for eating at restaurants. How would you like to pay for that one meal ten times? That's effectively what happens.

Robbing Peter to Pay Paul

The most dangerous use of a credit card is using one credit card to make the payments on another. This is just one example of what "robbing Peter to pay Paul" means. In this case, however, it's much worse because you end up paying finances charges on two credit card accounts instead of one. One person told me he called it "creative financing". I told him he needed personal finance training, not more credit cards.

One way out of a situation like this is to file for personal bankruptcy. Bankruptcy is never a good idea because it destroys your ability to get the credit you actually need. I don't know many people who can afford to buy a car or a house without using some form of credit. The better way to go is to reduce credit card debt through long-term financial planning. If the situation is extremely pressing, consider either mortgage or consolidation loans [Danish language link].

Debit Cards and Secured Credit Cards

Debit cards and secured credit cards work the same way: You're using your money. The only difference is that there aren't any interest or finance charges on debit cards. With a secured credit card, you're backing your credit with your own money and borrowing against your own balance. A lot of people use 401K accounts for the same thing.

A lot of bank ATM cards also serve as debit cards. Some of them can serve as either credit cards or debit cards. You just have to select which type when you're making a payment or purchasing something. Using bank cards as debit cards is not dangerous at all. It's your money. Using secured credit cards isn't dangerous, but you can still end up paying way too much in finance charges.

My Life and a Lack of Credit

I've never been happier since leaving credit cards behind (but not debit cards — I have two), which happened when I moved to the Philippines. Some people would call me lucky to be able to do that and get away with it. I call it shrewd financial planning.

I sold my house when the housing bubble was at its peak, not really knowing that it was. I made the decision to sell when I made the decision to move out of the country (the US). I made sure I paid off my credit, sold my car, and got rid of anything that would require recurring payments. I didn't need any of my own "dead horses" to continue haunting me.

I now live on a limited, restrictive budget due to a fixed pension. Believe it or not, I have much more disposable income than when I had a good, full-time job and unlimited credit. In the US, people are living beyond their means — using more credit than necessary simply because they can. The result is a nation dependent on credit in order to survive. I, on the flip side of a coin so to speak, am living within my means and not using credit at all.

• Getting VISA Credit or Debit Cards in the Philippines
• The End of Banking Debit Card Overdraft Fees?
• Use VISA and MasterCard Gift Cards for Christmas Instead of Cash or Check
• PayPal and My New EON VISA Electron Card
• Basic Budgeting or How to Live from Paycheck to Paycheck and Survive