There is an age-old debate in the financial community – whether debit cards are better than credit cards. There are some people who love credit cards, and some who hate them. And of course, there are even those who believe you shouldn’t use either, and you should only spend cash. But cash isn’t practical for all spending needs. Sometimes you need to use a credit card or debit card when cash is either impossible, or impractical. In those instances, you will most often need a debit card or credit card.
Which camp you fall under depends on many factors, and in many cases, there is no right or wrong, one-size-fits-all answer. What does matter is which answer is right for you. So let’s take an in-depth look at both credit cards and debit cards so you can make the best decision for your situation.
Differences Between Debit Cards and Credit Cards
Availability of Funds. Purchases from your debit card come directly from your checking account. Transactions which require a signature generally take up to three days to clear while PIN transactions can clear immediately or within 24 hours. You may be able to use overdraft protection for your debit card and draw funds from a linked savings account if you don’t have available funds. Keep in mind some banks charge for overdraft protection.
Credit card purchases are different. The merchant gets the money from the credit card issuer, then you agree to repay the credit card issuer. Credit card purchases generally do not post to your account immediately, however an authorization to hold funds takes place. If you are close to approaching your credit limit using your card on several occasions in a short period of time may result in going over your credit limit resulting in additional fees and higher interest rates being applied to your balance.
Security And Protection. Regulations and policies protect you in the event your credit or debit card are lost, stolen or used by an unauthorized person. While the protection is there for both, the level of protection differs between debit and credit cards. If your credit card is lost or stolen and you notify your card company before charges have posted to your account you are not responsible for any unauthorized charges. If charges have already posted you will only be responsible for the first $50 of charges.
Debit cards offer this protection as well, however you must notify your card issuer with two days of discovering unauthorized charges or the loss of your card. Notifying your card holder within two days limits your liability to $50. If you don’t notice the transaction within two days and report the charge between 2 and 60 days your liability increases to $500, after 60 days your liability could be limitless. In the meantime you are out that cash and even if you are credited the amount in the future, don’t expect the credit to appear in a timely manner.
Zero-liability policies. Visa and MasterCard offer zero-liability policies for credit card holders which means you are not responsible for any charges made when your credit card is not present. This covers online purchases or instances where credit card numbers are entered manually versus swiping the physical card at the merchant location. While zero-liability policies exist for debit card holders, it only applies to transactions that do not require use of your PIN.
Debit Card Benefits
Debit cards have a few benefits – namely, you can only spend what you have in your checking account. What you spend is automatically debited, and you won’t rack up any interest because you can’t carry a balance.
- Good Consumer Protections: Debit cards have much better consumer protections than they used to. In fact, they are now similar to credit card protections in many cases. However, your bank may place a hold on disputed charges while they investigate. This may tie up funds. Check with your bank for specific details.
- Access to Cash: Most stores allow you to get a cash back when you make a purchase. I’ve been known to buy a $1 pack of gum so I can get $40 cash back with my purchase. I get a pack of gum, and I avoid the $3 ATM fee. It’s a cheap and easy way to get cash when your bank’s ATM isn’t convenient. You can’t get cash back with credit card purchases, and credit card cash advance fees are outrageous.
Credit Card Benefits
Credit cards have a variety of benefits, and in my opinion, they outweigh those of debit cards, if, and I stress the word if, they are used properly.
- Excellent Consumer Protections. If your card is lost or stolen, you are only responsible for the first $50 in unauthorized charges. And many credit card issuers have a $0 fraud liability. You can also dispute charges with your credit card issuer, which won’t tie up your funds while the dispute is active.
- Credit Card Rewards. Credit cards are also famous for offering generous rewards, including cash back, airline frequent flier miles, travel rewards, credit card points, hotel rewards, and much more.
- Other Credit Card Benefits Include: being able to establish and/or improve your credit score, extended warranties on some purchases (varies by credit card issuer), and use as an emergency source of funds.
Debit Card Risks and Downsides
There is more risk with using debit cards than many people are aware of. The two primary risks are fraud and holds.
Debit card fraud: The primary risk involve overdrawing your account. Most banks will allow you use overdraft protection. This allows you to link a savings account to your checking account in case you overdraw your balance. And many people don’t believe they are at risk for overdraft problems because they carefully monitor their spending and their checking account balance. Unfortunately, even the best laid plans can go awry, even through no fault of your own. If someone steals your debit card number, you can have your checking account balance drained in minutes, leaving you broke, and without a means for spending money. To top it off, many banks will charge overdraft fees for each transaction that puts you in the hole.
The problem usually isn’t even the fault of the consumer. There have been many large data breaches over the ast few years, exposing millions of consumers’ credit and debit card numbers. Home Depot, Target, Michaels, K-Mart, and dozens of other major data breaches come to mind. Many debit card holders discovered that while their bank offered them consumer protections and they wouldn’t ultimately lose their money, they sometimes had to wait several days or weeks while the investigation played out. This ties up your money and leaves your checking account, and sometimes savings account, empty until the investigation concludes.
Debit card holds: Some vendors place a hold on your bank account when you make a debit card purchase. Merchants can ‘block’ a certain amount of money in your account when you make a purchase or reservation. An example would be a hotel or rental car reservation. Often times the hotel or rental agency will block several hundred dollars in the event of incidental charges. Many times this money is locked up for several days before it is released. This is also common when buying gas. This can cause problems if you don’t have a lot of money in your checking account.
Credit Card Risks and Downsides
Credit card risks: In a word: debt. Credit card debt is one of the leading causes of financial struggles. And it can be easy to get into. A small charge here, another there, a couple a day, and the next thing you know, you don’t quite have enough to pay off your balance at the end of the month. So you pay the minimum, or a little more, and keep spending. And spending. The next thing you know, you have a four or five figure credit car balance, and no plan to pay it off.
Increased spending. Another downside to swiping a credit card is that studies show people who spend with a credit card are more likely to spend more money with a credit card than if they are spending cash. This can also apply to using a debit card, so this argument may be a wash.
When Debit Cards are Good to Use
Here are times when you should consider using a debit card instead of a credit card:
- When there are no fees involved. Most major banks have eliminated debit card fees.
- When they have similar fraud and return protections as credit cards do.
- If your bank has a rewards program for its debit cards, though these are becoming very rare.
- You want to get cash back because your bank’s ATM is not convenient and you do not wish to pay $3 to get $20 of your own money.
Other times debit cards are worthwhile: If you have no credit, bad credit, or are paying down your credit cards and don’t wish to add more debt, then debit cards are likely a good option. If you have no credit, I would consider establishing credit by getting a secured credit card and regularly paying the balance in full each month.
When Credit Cards are Good to Use (and when to avoid them)
Here are times when you should consider using a credit card instead of a debit card (note: this assumes you pay your balance in full each month):
- If you are concerned about fraud, theft, or consumer data breaches (credit card protections don’t tie up the money in your checking account, leaving you free to continue spending).
- When you will pay the balance in full each month.
- If you want to earn rewards such as cash back, airline miles, hotel points, etc.
- When trying to build your credit score.
When you should absolutely not use a credit card: You shouldn’t use a credit card if you habitually carry a balance, fail to make on-time payments, or use or exceed all your available credit. All of these will cost you a tremendous amount of money in the long run.
Which is Better – Debit or Credit?
Both options have benefits as long as they are used responsibly. The best way to manage your personal finances does not begin with how you pay for your purchases but with your spending habits themselves. If you stick to a budget and live within or below your means both options should serve your purchasing needs sufficiently.
But Which Do You Use, Debit or Credit?
I use credit cards, almost exclusively. I will use my debit card for cash back or sometimes at local stores, because I know debit cards cost the owners less in transaction fees. Otherwise, I almost exclusively use my credit cards. There are two primary reasons: security, and rewards.
Security: Data breaches and theft aren’t going away. In fact, they have become more costly over the last few years. Millions of dollars have been stolen by thieves from those data breaches. I would hate to have my bank account drained overnight. It happened to a friend of mine when he was on vacation. It ruined his vacation and he almost couldn’t get back home. Not fun.
I’ve also had my credit card number stolen on 2 occasions in the last 5 years – neither through any fault of my own (both were data breaches from large retailers). I wasn’t out any money from those thefts due to the credit card protections. But I hate to think what could have happened if my bank account was tied to the thefts.
Rewards: I also love credit card rewards. My family and I have used credit card rewards to pay for free airline tickets, get cash back, and earn other rewards, all totaling thousands of dollars. This was all earned in the course of regular spending, and we don’t go out of our way to spend extra to earn a few more points.
Finally, I pay my balance in full each month. I also review my statements each month to ensure the charges are legitimate, and to monitor my spending. Then I have my balance automatically pulled from my bank account each month by my credit card company, further ensuring I won’t miss any payments and incur any interest or late fees. It’s easy to do with just about any credit card company. Just log into your credit card account and link a bank account, then click submit. You can also do it over the phone.
For my purposes, credit cards are the most secure and rewarding form of payment. I don’t expect that to change any time soon.