Pssst, Millennials! When You Pay, Choose Credit, Not Debit

Friends with woman holding out credit card at coffee shop
Wavebreakmedia Ltd PH29L/Alamy

Hey, millennial! Yes, you there, standing in line at the Starbucks (SBUX) counter, tapping away on your smartphone, with the button-like doodads growing into your earlobes -- put away that debit card.

No, don't worry. No one's going to nag you about buying a cup of overpriced coffee. We all have our vices. And you're still basking in the fresh glow of youth. At least your vices won't hurt you as much as they'd hurt us old codgers.

But the way you're buying your coffee -- you're doing it wrong. And you're not alone.

Paper or Plastic?

According to a recent survey by CreditCards.com, only about 1 in 3 American consumers currently uses a plastic card -- credit or debit -- when buying something that costs $5 or less. Most folks still pay with cash for such small purchases, with folks ages 65 and up having the greatest fondness for paying with greenbacks (82 percent).

But when it comes to the Millennials, 51 percent use plastic to pay for such purchases.

On one hand, that's not terribly surprising. The younger you are, the more comfortable you are paying with plastic, which didn't gain widespread acceptance in America until the 1960s. Conversely, the older you are, the more likely you've been told, at some point in your life, that shopping with cash is a good way to limit your spending and encourage saving.

There's only so much cash that will fit in your wallet, and if you limit yourself to paying in cash -- you eventually run out. Old folks like me, whose memories aren't what they used to be (and maybe never were), like this "automatic" check on spending. And as a result, CreditCards.com reports that the older a consumer is, the more likely he or she is to pay for small purchases in cash than to pull out a plastic card.

Not All Plastic Is Created Equal

Among plastic cards, nationally, consumers are about twice as likely (22 percent) to use a debit card to pay for a small purchase as to put the purchase on credit (11 percent). When the data is broken down by age group, it turns out that millennials are even more fond of debit cards than the average shopper. Consumers ages 18 to 29 use debit cards more often than any other age group when making small purchases.

But here's the thing: Debit and credit cards may be nearly equal in their convenience of use when shopping for small items (eliminating the need to carry weighty pockets, jingling with unwanted coins). But they're not at all equal in the financial benefits they convey to a consumer.

To cite the most obvious example, credit cards often offer you "rewards" for using them. With card companies charging retailers fat interchange fees for every transaction they process, they can afford to pay you generously when you "choose plastic." Airline miles; "points" redeemable for cash back, account credits, merchandise, and gift cards; and just plain cash-back offers, as high as 5 percent, all make the choice between credit and debit a bit of a no-brainer. (Granted, some debit cards offer rewards of their own -- but they're rare, hard to find and usually much less generous.)

But rewards are only the most obvious monetary benefit of choosing credit over debit. Consider: When you pay for a purchase -- large or small -- with a debit card, that money is almost immediately deducted from your account.

What Warren Buffett Thinks

In contrast, a charge placed on a credit card is a debt that doesn't come due -- and needn't be paid -- until your credit card bill is sent to you. Depending on the date of purchase and the due date on your credit card bill, you may not have to pay that bill for as long as a month -- which means you may be able to hang on to your money, and collect interest on it at your bank, for that time. (Super-investor Warren Buffett calls this concept of using someone else's money, and collecting interest on it for your own benefit, "free float," and deadpans that his business partner "Charlie and I find this enjoyable.")

Granted, with the ultra-low interest rates that banks are paying on checking accounts these days, free float isn't as profitable as it used to be -- probably only pennies per credit card billing cycle. But still, free money is free money. Are you going to turn it down because you're not being offered enough free money?

Of course, you do need to remember to pay your credit card bill on time, so as not to get hit by late fees. But as long as you can manage that, a credit card isn't really a card you use for taking out long-term credit at all. It's a pay-once-a-month debit card -- that pays you free money every month.

The High Cost of Not Buying on Credit

Another advantage: CreditCards.com quotes Martin Lynch, director of education of the Cambridge Credit Counseling Corp. of Massachusetts, noting that "debit cards ... can't be reported to the credit bureaus and, thus, they don't build [up] credit [ratings]." Building up a strong credit rating is crucial to a young person looking to buy his or her first car or to secure a mortgage on a starter home.

Getting charges and on-time payments, onto your credit report -- to establish a track record as a reliable borrower -- is therefore a good thing. It's something you want to do as often as possible, and using a credit card to pay for small purchases is a great way to build up your credit report quickly.

Melinda Opperman, senior vice president of community outreach at Springboard Nonprofit Consumer Credit Management Inc., another expert interviewed by CreditCards.com, echoes the sentiment: "We like the idea of using credit cards frequently for small, manageable expenses. This gives users the benefit of an active credit history, but leaves them with monthly bills that are small enough to pay off in full, so they don't have to pay any interest."

Suffice it to say, any idea that's supported by professional credit counselors, and by the world's third richest man, is one that millennials would be well advised to take to heart.

Motley Fool contributor Rich Smith has no position in any stocks mentioned, and hasn't used a debit card in years. The Motley Fool recommends and owns shares of Starbucks. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.

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