Debit cards have revolutionized the way that consumers can make their daily purchases, as the hassle of carrying around cash is all but obsolete these days. Knowing that your money is safely tucked away in an interest bearing, FDIC insured savings or checking account is more than enough reason to carry a debit card. However, there are a few downsides to regularly using them instead of your credit card. Let’s take a look at the 5 major reasons you should consider using your credit card to make a purchase, instead of your debit card.
- Using Money Interest Free – How often in your life are you going to be able to get an interest free loan from a bank? In essence, your credit card company is willing to give you a 15-20 day interest free loan on all of the purchases you make, so long as you pay off the card in full each month. If you are living paycheck to paycheck, having this grace period can be an invaluable way to make ends meet each month. Using your debit card for a purchase means the money is instantly taken out of your account.
- You Can’t Build Your Credit With a Debit Card – If you could, it would be called a credit card! Whether you have a FICO credit score of 800 or 400, always building positive credit is important, and that simply cannot be done with your debit card. Banks do not report the use of a debit card to the credit bureaus, and the only way TransUnion, Experian and Equifax will learn of your debit card use is if the bank reports the account in collections, which is never a good thing. Using your credit card on a month to month basis and, more importantly, paying that credit card account in a timely fashion every month, goes a long way in building your credit score.
- Identity Theft Can Wreak Havoc On a Debit Card – Identity theft is becoming an increasing problem in the United States. If you are a victim of identity theft, or outright fraud, you are not given the same protections on your debit card that you are with your credit card. Because every debit transaction requires your four digit pin in order to be approved, banks are less forgiving in their return of your funds. So unlike credit cards, there are limitations to what you can recover. If you report the misuse of your card within 2 days, you are liable for $50 worth of what was taken. If you fail to file a report within this time frame, you are liable for up to $500. Should you spazz out completely and not report anything within 60 days, you are liable for the entire amount taken. Make sure that if you are using a debit card regularly, you check your bank account at least a few times a week.
- Protection on Big Ticket Items - There are at least two reasons whey credit cards are the better choice for big ticket items. First, if you have a credit card that pays cash back, points, or miles, using credit over debit could put a lot of money back in your pocket. Second, most credit cards offer some form of insurance that covers your purchase for some period of time. For example, MasterCard’s standard coverage doubles the manufacturer’s warranty for up to one year. The terms of shopping protection vary from card to card, so make sure to read the terms and conditions carefully.
- Those Dreaded Overdraft Fees – How can a debit card be designed for spending the money that you have deposited, then charge users for overdrawing their accounts? If you are not careful when signing up for a savings or checking account, you may be given a certain amount of “overdraft protection.” The banks have decided that they are going to help you out and allow you to spend more than you have available, generally somewhere along the lines of $50-$250 more. Depending on the bank, every time you overdraft your account, no matter if it was by $1 or $100, you will be charged a king’s ransom in the range of $20-$40. Note that the Federal Reserve has adopted new rules that limit a bank’s ability to automatically sign up a customer for overdraft protection. The rules go into effect later this year.
Of course, there are downsides to credit cards, too. From over the limit fees to interest if you fail to pay off your card in full each month, using a credit card has its own risks. No matter what payment form you use, the key is to understand the rules and to use the card responsibly.
Published or updated July 7, 2010.