Five Reasons That Credit Cards Rock and Debit Cards Suck
I recently wrote about the convenience of debit cards as well as one potentially major downside. In short, while I’ve seen the light with regard to the ease of use of debit cards under certain circumstances, I’m still a credit card devotee. Why? Read on to find out.
1. Fraud protection. While many debit card issuers promise fraud protection on par with credit cards, including limited liability, fraudulent activity typically results in an investigation before the questionable charges are eventually reversed. Would you like to have your bank balance tied up while things get sorted out?
2. Rewards. While some debit cards offer rewards of various sorts for making purchases, the most generous programs are generally tied to reward credit cards.
3. Building a credit history. It’s hard to build a credit history without actually using credit.
4. Freedom to borrow at 0%. You can make a killing using 0% balance transfers to get your hands on free money that you can then stick in a high yield online savings account. Just make your minimum payments and then kill it off before the 0% period ends. The interest that you earn is yours to keep, free of charge. Check out my guide for making money from 0% balance transfers.
5. No holds on your hard-earned cash. I brought this up in a recent post about excess hotel charges, but… Whenever a merchant (e.g., a gas station) decides to place a hold on your funds, your otherwise spendable cash will be locked up until they decide to release the hold if you made the mistake of using a debit card. If you had used a credit card, on the other hand, they’d have just locked away a portion of your credit line.
So there you have it… Five reasons why credit cards are better than debit cards. If you have any more to add to the list, please leave a comment. Or if you happen to disagree, feel free to poke holes in my arguments.
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I’ll take a stab at it.
Fraud protection: This risk isn’t gone with a credit card, it’s just delayed. I’ve had one problem with a debit card, not fraud, but an incorrect transaction at a merchant. I’ve also had to dispute a transaction with my credit card. There is always an investigation, so you’d better keep your receipts. If a month goes by and the bank concludes the transaction was not fraud, you get dinged for the amount onto your credit card…including interest from the date of the original purchase.
The rewards programs are often tedious and time consuming, with many confusing terms. I have a cash back program with one of my cards, and I’ve used it…but it is a huge hassle.
Borrowing at 0% is a risky game, one slip up could cost you a lot of money. Also all of my cards now charge a % transfer fee, so my earnings would be minimal. Not worth the hassle.
I agree with the hotel thing, but I still pay with debit once the final bill comes. No holds there, and I’ve yet to find a gas station to hold $50+ of my money. They always hold a dollar. I prefer to buy gas at the grocery store stations anyway, mine gives a 10 cent discount when I spend $100 more in the store (which I always do anyway) and they run it like a regular transaction.
Also, credit card purchases do not show up online the same day. It can take a few days for it to appear. When I use debit, it shows up on my account instantly.
Debit/credit cards have their uses. For travel, online shopping and major purchases, I use credit cards. For every day smaller purchases, I stick to debit.
Comment by Chris — May 9th 2007 @ 11:48 amChris: I agree that the fraud risk is relative, but I’d much rather have part of a credit line tied up (complete with a 25 day grace period) as opposed to having my cash tied up starting right now. Good point on saving receipts (in fact I’ve written about that recently) although that doesn’t help with an out and out fraudulent transaction.
Reward programs are tedious and time-consuming? Some are, yes, but with my Citi Dividend Platinum Card the rewards just pile up and then I can log in periodically and request a check. It takes all of one minute every few months to cash out my rewards.
Not sure what your point is about debit card transactions showing up immediately — is this related to fraud detection? Because otherwise it doesn’t really matter to me (and I just check my CC bills for odd transactions when they arrive, not on a daily basis).
Credit cards are a great cash flow management tool. They’re also a great way to track your expenses.
-limeade
Comment by limeade — May 9th 2007 @ 7:10 pmI’m with you all the way — especially on point #2.
Comment by FMF — May 10th 2007 @ 9:14 amWe use credit cards rather than debit specifically for the rewards–the other stuff is an added bonus.
Comment by Mama Money — May 10th 2007 @ 10:25 amI can’t agree with you on the fraud protection. I bank with Wachovia, and they offer protection on their debit cards. I thankfully have never had to use it, but I know someone who has and they got their money back.
I’ve never had a credit card, and I’m glad. I would have so much more debt right now if I did. With student loans, a car payment and hospital bills, I’m up to my ears in payments. Don’t want to add a credit card to the mix.
Comment by Nathania Johnson — May 10th 2007 @ 10:57 amI have to disagree on #1 #3 and #5
I credit union offers a good fraud protection on my debit card.
Credit History - My mortgage and student loans gave me a good history.
and I recently rented a car and they did a hold of my debit card the next day the funds were back on my card. They only did a hold for 24 hours.
For as Rewards, It is just another ploy for the cc companies to make you use their card.
Comment by Moneymonk — May 10th 2007 @ 12:16 pmI prefer debit cards. They put limits on our spending behavior allowing us to purchase only things we need with whatever money we have on hand.
I know it’s ultimately our choice what we buy, and even using credit cards, we can self-regulate our spending, but research shows that we are weak and succumb to tempting advertisements, so we end up buying lots of things we don’t truly need. Many people spend well beyond their means on items they don’t need, only to be stuck with high balances along with high interest rates. Our current consumer trends show that we as a nation spend well above our means with credit cards. When using debit cards, it’s nice to know that there is something beyond a high credit limit controlling our spending behavior, and although we can deplete our accounts, we will never become indebted to someone else due to irresponsible spending behavior.
Comment by SummumBonum — May 10th 2007 @ 2:39 pmDebit cards and Credit cards are regulated by two different parts of the government that is why the rules are completely different, but the disparity between them is not entirely evident.
All this starts with the cards looking almost identical to consumers. This leads many to the conclusion that because they look alike they are alike. The biggest difference to them is one gets billed and the other comes from their checking account. What else could there be?
Under the Fair Credit Reporting act you cannot be held responsible for unauthorized charges to your credit card. The burden you face is to prove you did not make the charges, file a police report etc. Your liability is generally limited to $50 per card.
The people who have their debit cards compromised fall into a whole different category of liability. Within the first 2 days you liability is capped at $50. Up to 60 days it is capped at $500, after the 60 day window you are wide open for unlimited liability or the balance of your account. Those clocks start ticking the day you notify your bank of the theft, or the date of your first paper or online statement where the unauthorized charges appear. You become “notified” even if you don’t open up the envelope or bother looking!
Remember , the “Zero Liability” card you have is not a mandate to the bank from the government, only a courtesy from your bank. Even then, it is at their discretion who is truly liable.
I’m sure many do not bother to review their charges or statements because they feel “protected” and have “zero liability”.
Comment by Michael Durnack — May 11th 2007 @ 3:21 amFor as Rewards, It is just another ploy for the cc companies to make you use their card.
You’re thinking about this backwards. Rewards are just another opportunity for you to take advantage of the cc companies.
I use exactly two credit cards: my chase freedom card for groceries (where I get 3% cash back), and my Emigrant direct card on everything else (1.4% reward deposited directly to my emigrant account). Since I pay the complete balances every month, interest rates are irrelevant.
I’m buying a home this year, and plan to furnish it with a 0% credit card. Depending on what’s on the fine print, I’m might even purchase with my Emigrant card, collect the 1.4% reward, then transferring the balance to the 0% card. I immediately ‘pay’ the full amount of the charges into my savings account, earn 5.05% APY, then pay the full balance a year later.
Comment by Independent George — May 11th 2007 @ 10:40 amHere are some reasons debit cards are better:
* There is never any interest charged.
* No late payment fees. Even if the bank screws up and forgets to mail your statement, etc.
* You can’t spend more that you are able to pay.
* It hurts more when you spend the money so you spend less. (Not much less, but more than the reward points.)
* Some banks pay reward points on debit card purchases also!
Comment by Jeremy Bettis — May 11th 2007 @ 12:31 pmAgree with Nickel and Independent George. Most of the complaints against credit cards come from people who feel they cannot resist buying things they cannot afford.
“There is never any interest charged.”
If you pay in full every month, there is no interest charged on credit cards either. You usually get a couple of weeks to a month before you get the bill + 25 days grace period. During this time your money are in the bank earning interest. Plus you get the rewards. Not much, but it’s free (as long as you pay in full).
* No late payment fees. Even if the bank screws up and forgets to mail your statement, etc.
Even if they forget to mail your statement, you should know that you usually have to pay it by the end of the month. So, you should call them and ask how much you owe. Better yet, sign up for automatic payment (in full). Many credit cards allow you to set up your account to have the full amount automatically deducted from your checking account by the due date. I do it with my main credit card. Not only I am protected if my check gets lost in the mail, but I also get the advantage of the full grace period since they deduct on the last date.
* You can’t spend more that you are able to pay.
If you sign up to have your full balance deducted from your checking by they due date, you cannot spend more than you are able to pay either. You still have to make sure you have the money on your checking.
* It hurts more when you spend the money so you spend less. (Not much less, but more than the reward points.)
The thought of having to pay 15% interest should hurt too. As long as you keep in mind that if you don’t pay your balance in full, you’ll pay 3 times more in interest than you could get in a bank, you will not even consider it an option. Learn your math.
I think it’s a little like alcohol. People who are addicted should avoid it, so those who cannot resist buying stuff they cannot afford shouldn’t have credit cards. The rest of us can enjoy the convenience of it. BTW - I’ve used credit cards for 25 years, and I’ve never paid a penny in interest. Nor have I ever bought anything I couldn’t afford.
Comment by kitty — May 11th 2007 @ 10:53 pmWell said Kitty! You took the words right out of my mouth. Credit cards aren’t the problem… but rather the lack of financial discipline!
Comment by Jim (the cash back calculator guy) — May 12th 2007 @ 7:59 amOne other big downside to debit cards that I wrote about sometime ago is that they do NOT protect you from overdrawing your account. A lot of people seem to think that “you can’t spend more money than you have” with a debit card, and that’s not true, and you’ll get socked with an immediate overdraft fee of probably $35 or so, which is far more than what you’d pay in interest if you had to carry a small part of your balance on your credit card.
Comment by dimes — May 12th 2007 @ 11:08 pmI’ve seen this happen with sailors who forget that their deposit doesn’t hit their account until the first of the month, or when one spouse is deployed and the other is at home and they have a communications breakdown about the money, which can lead to overdraw. Situations like that could be avoided altogether (or at least greatly minimized) if they weren’t working with their raw bank balance.
The point you make in regards to holds on debit cards, that is TOTALLY insane!
That alone is enough reason not to get a prepaid debit card, go for a credit card. Placing a hold on you money is NOT right.
Applying for a credit card is definitely a better option
Comment by Crediteria.com — May 13th 2007 @ 4:50 amApplying for a credit card is a better option only if you can actually qualify for a credit card.
Comment by Minimum Wage — May 15th 2007 @ 12:03 pmWell, yeah… If you can’t qualify for a credit card, then you probably shouldn’t have one. The standards aren’t actually that high.
So, you can’t use cash at hotels? I know that you can’t reserve a hotel room at some places without some kind of card, but I haven’t run into that problem yet.
I agree that the whole thing comes down to your financial discipline, but I don’t agree with the whole “if you set it up so that you automatically deduct the full amount when the bill comes, it’s the same as a debit card.” It’s not. Because one way you’re watching the number go down, the other way the number accumulates and if you aren’t watching it, you’ll end up in even more mess.
Stick with spending what you have instead of borrowing and being dependent on your organizational skills.
Comment by MInTheGap — Jun 7th 2007 @ 9:03 amCredit cards also provide a month of float between monthly bills from the time the bill is closed and the bill is due.
It all adds up!!
Comment by jojo — Jun 8th 2007 @ 7:48 amI only disagree with you on points number 1 and number 3, but particularly number 3. I really don’t think a credit history matters, as I had to file bankruptcy several years back due to credit card debt, and it never stopped me from getting about 5 new card offers in the mail.
I do however prefer a credit card over a debit card.
Comment by debt free — Jun 24th 2007 @ 2:39 amThe only thing a credit card is good for is building credit.
Why would any smart person want to pay money to spend money.
If your using a credit card as float then you need a different job because your not making enough money.
Using a credit card to manage your money?
Credit cards are just a payment tool if your using it as part of your budget then your about to get into trouble.
Browning cash from your credit card is just stupid.. All of the cards I have ever seen start charging you interest from day one.
With saving accounts currently paying you 2% and more credit cards charging you 14% and up your losing money.
Oh got a 0% card??? be one day late on that… and your interest rate will zoom to 32%!!!
Credit card company’s are there to make money for themselves not to help you in anyway.
Comment by zbeast — May 16th 2008 @ 3:13 pmUmmm… I ever say that credit card companies are there to help us? We use credit cards for convenience, rewards, and for automatically extending the warranties of the things that we buy. I’m also not a fan of the tendency of a bank to place a hold on your cash when using a debit card at a hotel, gas station, etc.
Ed McMahon understands that debt is not a tool.
It’s a trap. And habitual use of debt creates a tolerance for risk which results in a trap.
Those attractive “deals” aren’t there to make anyone rich - except the issuer.
They count on the holder to carry a balance just to earn points. Then they walk the limit up to 10k or 20k and all they need is one over limit charge or one late pay.
Then Default Terms apply and that friendly 2.9% become 29.0%.
Ask anyone who has been there - the duffel bag and the ball cap bought with the points just weren’t worth it.
The borrower is slave to the lender. The knowledge is ancient.
Comment by ConanTheLibertarian — Jun 9th 2008 @ 8:29 pm