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Five Reasons That Credit Cards Rock and Debit Cards Suck

Written by Nickel - 31 Comments

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.

Published on May 9th, 2007
Modified on May 10th, 2007 - 31 Comments
Filed under: Banking, Credit Cards

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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31 Responses to “Five Reasons That Credit Cards Rock and Debit Cards Suck”

  1. 1
    Chris Says:

    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.

  2. 2
    nickel Says:

    Chris: 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).

  3. 3
    limeade Says:

    Credit cards are a great cash flow management tool. They’re also a great way to track your expenses.

    -limeade

  4. 4
    FMF Says:

    I’m with you all the way — especially on point #2.

  5. 5
    Mama Money Says:

    We use credit cards rather than debit specifically for the rewards–the other stuff is an added bonus.

  6. 6
    Nathania Johnson Says:

    I 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.

  7. 7
    Moneymonk Says:

    I 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.

  8. 8
    SummumBonum Says:

    I 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.

  9. 9
    Michael Durnack Says:

    Debit 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”.

  10. 10
    Independent George Says:

    For 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.

  11. 11
    Jeremy Bettis Says:

    Here 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!

  12. 12
    kitty Says:

    Agree 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.

  13. 13
    Jim (the cash back calculator guy) Says:

    Well said Kitty! You took the words right out of my mouth. Credit cards aren’t the problem… but rather the lack of financial discipline!

  14. 14
    dimes Says:

    One 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.
    I’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.

  15. 15
    Crediteria.com Says:

    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

  16. 16
    Minimum Wage Says:

    Applying for a credit card is a better option only if you can actually qualify for a credit card.

  17. 17
    nickel Says:

    Well, yeah… If you can’t qualify for a credit card, then you probably shouldn’t have one. The standards aren’t actually that high.

  18. 18
    MInTheGap Says:

    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. :)

  19. 19
    jojo Says:

    Credit 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!!

  20. 20
    debt free Says:

    I 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.

  21. 21
    zbeast Says:

    The 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.

  22. 22
    nickel Says:

    Ummm… 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.

  23. 23
    ConanTheLibertarian Says:

    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.

  24. 24
    Neil Shearing Says:

    >Ed McMahon understands that debt is not a tool. It’s a trap.<

    Debt is only a trap is you’re uneducated about debt.

    I’ve used credit card balances at zero percent APR for nine months and put the money on my mortgage. Saved about $100 per month. After nine months I switched the debt to another card and so on. This was in the era of cheap credit, but it worked like a charm.

    There’s nothing like having a bank help you pay your mortgage. :)

    Neil
    third party processors

  25. 25
    Shamatava Says:

    Funny thing is most rich people does not need credit card. Most credit card owners are broke, leave from pay-check to pay-check, and leave only for making payments on time.

  26. 26
    nomad Says:

    Great now read “five reasons why you should tear up your credit cards and never use them ever again”

  27. 27
    needaraise123 Says:

    there have been some interesting things said. First, to the person that pompously replied its not that hard to qualify for a credit card, lending practices have drastically changed in the past few years. Things that would slide before won’t now, particualarly for a credit card with a major bank like Chase and Bank of America. And what about a young adult or student that has insufficient credit due to factors outside or his or her control? Regarding the holds on your account, i work for a bank and hotels and car rental agencies will put a hold, or authorization is the correct term, on a credit card or a debit card. How long it will remain there is bank specific but I see credit cards all the time with holds. Same with gas. Some debit and credit cards will hold the $75 and some will merely authorize for $1. I can understand trying to rack up rewards and things of that nature, but as someone stated, you can earn rewards on debit cards now, too. It is true it is at a slower rate, however, but reward programs on credit cards have also changed. Also, regarding the 0% balance transfer offers, those are not as abundant as they used to be. If you do find one it is for 6 or 12 months generally and then you have to find a new bank victim. The issue with that is part of you credit score is based on the average length of times your accounts have been opened. If you keep opening new accounts and closing your old ones to keep a promo APR, it will affect your score. For the fraud argument, the reply that credit card companies will investigate is true as well. As for when you see the credit, that is bank specific. Chase, for example, will credit your credit card immediately, but they will also credit your checking account immediately. To the comment about the benefits like purchase security, extended warrenty and rental car insurance, i actually have a gold Visa debit card that has those benefits and I have a non signature Visa credit card that has none of the above. To the comment about overdraft fees on checking accounts being $35 if you overdraft, this is true. But on my credit card, my overlimit fee is $39 plue the interest. I will say that is true that you do need credit to establish credit so that argument is true. Even if you have mortgage, student loans and auto loans, lenders typically like to see a revolving line as well. In fact, a diversified lending history will factor into your score.I still wouldn’t say credit is better than debit. I think to each his own. I use both, but typically I use more debit card more.

  28. 28
    Get Debit Says:

    I totally agree, if you are diligent and make sure to repay credit cards on time, and don’t miss the repayment date when juggling the 0% offers, credit cards totally rock. But lots (most?) of people aren’t on top of their finances all the time, and slowly start to slide into debt when using credit cards or when trying to juggle 0% deals. For those people, any advantage gained with 0% or rewards or the other benefits of credit cards is totally lost when they start getting hit with 12% or 18% interest or late payments. Debit cards can be a great way to go for those people.

  29. 29
    Chris Says:

    Credit cards allow you to spend whatever the hell you want on shit you most likely don’t need. Debit cards, you can only spend what money you have. Therefore, you are actually responsible and mature with your money, instead of going out and spendings thousands on some workout machine no sane person would ever even consider buying, like a credit card holder would do. I mean, hey, it doesn’t lock up your money, SO SPEND AWAY!

    Credit card companies have people like this by the balls. They get off the phone, pour a glass of bourbon and sip on a cigar, all the while laughing and saying “another sucker bites the dust!”.

  30. 30
    Javier Cuestas Says:

    I use credit cards whenever possible. only use debit cards or cash where credit cards are not allowed (Aldi).
    Of course credit cards are not for everyone.
    Quoting a previous comment: “you are actually responsible and mature with your money” then I say you are ready to use credit cards and receive the benefits that they offer. If you are not responsible and mature with your money, then you will probably lose a lot of money with credit cards; use debit cards or cash instead. Know thyself or change yourself (for the better of course).

  31. 31
    free instant followers on instagram Says:

    It’s nearly impossible to find well-informed people on this subject, however, you seem like you know what you’re talking about!
    Thanks

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