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Yet Another Reason Credit Cards are Better Than Debit Cards

Written by Nickel - 16 Comments

Here’s a cautionary tale for those of you that prefer debit cards over credit cards… Earlier this week, someone at Dreamhost accidentally typed the wrong year into their billing software. The end result was a wave of inadvertent overbilling to the tune of more than $7.5 million.

Not only did this error annoy the vast majority of their customers, but it actually caused serious financial hardship for some. Indeed, although they’re refunding everybody’s money, those that had debit cards on file lost the money straight out of their bank accounts, and many ended up with overdrafts (read through the comments here). At least one customer even reported have their mortgage payment bounce because of this error. Not good. But for those that had credit cards on file, it was no big deal. Dreamhost restored the funds and life goes on.

So… It looks like my list of reasons that credit cards rock and debit cards suck just got longer.

Published on January 16th, 2008 - 16 Comments
Filed under: 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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16 Responses to “Yet Another Reason Credit Cards are Better Than Debit Cards”

  1. 1
    Hazzard Says:

    I was glad that I pay Dreamhost with my Paypal acct, although I got the email that two years worth of charges were due, they didn’t pull money from Paypal so no harm to me.

    I would DEFINITELY never use my debit card for online purchases or for recurring charges. I like the protection of the credit card as well.
    Hazzard

  2. 2
    Undertrader Says:

    Credit cards actually suck, for numerous reasons, including the 20+% interest on them, however, there is a place and time to need an actual credit card vs a Debit card.

    What I do is go to the local supermarket and buy a Visa gift card. I put $500-1000 on it and use that as my credit card. That way, I have the benefits of a credit card, I limit my exposure to things like what happened at Dreamhost. I pay no interest fees at all and I can’t over charge myself into oblivion.

    After spending last night helping a family friend deal with her $50,000 in credit card debt at 23%, and almost $1000 a month just for minimum payments, I think credit cards are just not worth the risk.

    – Undertrader

  3. 3
    nickel Says:

    Undertrader: High interest rates are only a problem if you carry a balance. As for your idea of buying Visa gift cards, there is typically a fee associated with the purchase of such cards. Also, what happens if you lose them? Do you have any recourse for getting your money back?

  4. 4
    Carol Says:

    *ponder* So overdraft fees are a bigger problem than overlimit fees (and the ‘default rate’ that sometimes accompanies them)? Seems like a rather biased viewpoint to me…

    Or are we assuming that the people paying with credit cards had sufficient room whereas the people using a debit card didn’t have sufficient cash?

  5. 5
    nickel Says:

    Carol: Good point on overlimit fees. We’re nowhere near our credit limits in any given month, so I wasn’t even considering that as a possibility. Nonetheless, I’d much rather deal with an overlimit fee than to have something like my mortgage payment bounce.

  6. 6
    kitty Says:

    Carol, nickel’s post deals with a case of a mistake. There is a major difference such mistakes as well as fraud are handled by credit cards vs debit cardsw.

    When such a problem happens with a credit card, you notice it when you get your bill, call the credit card company and dispute the charge – problem fixed. If you try to charge something before you noticed it, the credit card will not accept the charge, and you notice the problem even sooner.

    When such a problem happens with a debit card, your account is out of money at the moment they charge it. Sure, when you get your monthly statement, complain, they investigate, you’ll get your money back. In the meantime, your account is out of money and some of your checks will bounce. I am sure your mortgage company, phone, electric, maybe IRS (if it happens during tax season) will be very understanding…

  7. 7
    plonkee Says:

    I think I’m going to switch my regular dealings with American companies to credit cards from now on – my mortgage payment wouldn’t bounce, but I forget that there isn’t the same protection overseas that there is with similar payment schemes in the UK.

    With a credit card, at least I can claim back the money from the credit card company rather than whoever messed it up in the first place if need be.

  8. 8
    r.o.t.e. Says:

    @kitty,
    Now adays most people can check their accounts online…alomst all banks and credit unions have some way to check your account online as well as credit cards or use the phone to check your accounts. In the day an age with identity theft being a major problem, I would be surprised if you aren’t in the habit of checking it before you get your monthly statements and a little bit worried.And besides if something bounces, just like if your card is denied, the company usually calls you and tells you which would lead you to looking at your accounts credit or debit thus finding the problem before the monthly statement. So I think in some aspect your arguement is flawed.
    Also to nickel…granted those who used debit had their money taken out right then and there and they might have overdrafted and some had bounced payments but that doesn’t necessarily mean credit cards are better than debit (if you didn’t have the room on your credit card it would have been denied and if you had another automatic payment it to would have been bounced),I once had this happened to me where the business overcharged me and cause my account to overdraft and a payment to bounce. I simply called the company explained to them what they had did, made sure I had all the documents and then called my bank explained to them the situtation and within the week the company had refunded me my money and paid for the fees caused by their mistake. And the Bank had taken off some of the ovrdraft fees. I called the place of business where the payment had bounce and they were very understanding about it.
    It helped that I didn’t wait to deal with it. It would have been the same if I had used a credit card,same amount of time and effort for both. I’m sure those who had debit cards didn’t lose their money entirely.

  9. 9
    Anne Says:

    This is a great reminder to be careful how we pay for online transactions, especially recurring transactions. I still prefer cash for most spending and debit after that, but there is definitely a place for credit cards.

    I use a single-use credit card number generated by my cc company for online purchases, including purchases that I don’t want to be recurring (such as magazine subscriptions–I prefer to decide every year if I want to renew, thanks).

  10. 10
    kitty Says:

    r.o.t.e – are you checking your bank account every day? You don’t really know when the fraud will happen. Sure, the merchant whose payment is refused may call you. By that time you may have quite a number of overdraft fees that the bank isn’t required to return to you, even if they were caused by a fraud. Additionally, while the bank investigates the charge the money aren’t on your account. Unless you have extra cash to cover the shortfall for a while, this may be a problem.

    “(if you didn’t have the room on your credit card it would have been denied and if you had another automatic payment it to would have been bounced”
    I’d imagine most of those who pay their bill in full every month have pretty wide margin between the limit and expenses. Do you keep 13K on your checking at all time? If an automatic payment to a credit card bounces, the merchant calls me and I investigate, but I am not hit with fees immediately after it happens. The overlimit fee is applied at the end of the month. As soon as you report the fraud, the fraudalent charges being investigated are immediately removed from your statement, so you are no longer over the limit. Hence overlimit fee goes away as well. Not so with overdraft fees.

    Just today, in the office of my periodontist, I picked a Reader’s Digest for this month. There is an article entitled “Dirty tricks debit cards play” or something like it. Pretty interesting. For some reason people think that debit card issuers are nicer than credit card issuers and don’t want to get extra money. These are the same banks and the same people.

  11. 11
    r.o.t.e. Says:

    @kitty,
    Personally I check mines once a week (who said anything about checking every day?). But you don’t have to do that, if you check around the time when the automatic payments go out you are going to catch it. Another thing I wasn’t saying that debit cards are better than credit cards, what I’m saying is there are pros and cons to both types of cards, and one type is not better than the other.

    The post along with your comment made it seem that those with debit cards had it worse, and that’s misleadin, there are many different factors that were taken into mind when those statements wer made. Second I wasn’t saying the bank would call you ( i said company) if there was an overdraft (but if you check your account you are going to see a huge charge and question it), but the merchant will contact you if the payment doesn’t go through. Third, as some one mentioned earlier you are taking in to account that everyone who had a cc on file for this company had enough plus more to cover the overcharge and anything that came up at the time (I highly doubt that, not everyone who has a credit card has one a large credit line.). No you might not get hit with immediate fees, UNLESS you over the limit, but if you are than yeah you are hit with fees and some are worse than with a debit card. I’m more than confident in saying that “yeah there are probably some people who deal only with debit or cash like that (my sister works for a bank were there are about 80% of the clients like that.) have 13k just sitting in their checking account.

    “As soon as you report the fraud, the fraudalent charges being investigated are immediately removed from your statement, so you are no longer over the limit. Hence overlimit fee goes away as well. Not so with overdraft fees.”
    If the charges were fraudalent then the bank has to remove the overdraft charges and refund your money if the case maybe. If your bank isn’t than you should be switching some time soon. My bank offers protection just like a credit card, against fruadalent charges ( I don’t know of any bank that doesn’t now a days.) And the time it takes to investigate the fraudalent charges and prove that they were fruads, is both for each type of card (it depends on your bank and your cc carrier.)

    Even while the credit card is investigating the charges they don’t automatically give you the money, they wait until they can assure that it was in fact fraud. So again you don’t have the access to that money from the credit card.

    Ultimately what I’m saying is that the arguement of which type of card is better, is moot and the post was based on biased generalizations. Because to each it’s own. Every hit you can make about a debit card I can make about a credit card. This incident actually has nothing to do with having a credit card or debit card, but putting your finances on auto-pilot and then walking away. Computers were made by humans, humans are flawed. No one’s finances can really be automatic and not have any hiccups.

    *and the article has no affect on how I view debit cards vs. credit cards, I can go find a similar article on credit cards.*

  12. 12
    chosha Says:

    The kind of mistake you’re describing could also happen with a regular account out of which regular bill payments are made…should I not have a bank account because this highly unlikely type of mistake might occur?? Of course not.

    I love my Visa debit card – all the convenience of using a “credit” card when traveling or online and no interest to pay because it’s coming from my own money. I’ve had it for about eight years now and it was one of the best financial decisions I’ve ever made.

  13. 13
    kitty Says:

    rotc,
    “If the charges were fraudalent then the bank has to remove the overdraft charges and refund your money if the case maybe.”
    Not according to the article I mentioned, have you actually checked with your bank? There was a real case of a woman hit with overdraft fees, and while the bank returned the actual fradalent charge it wasn’t legally obligated to return overdraft fees on other checks. I suggest you check with your bank and ask specifically about overdraft charges on legitimate purchases that resulted in overdraft because of one fraudalent charge.

    “Even while the credit card is investigating the charges they don’t automatically give you the money, they wait until they can assure that it was in fact fraud. ”
    This is where you are wrong, at least as long as you complain during the grace period. At the time you get your bill, you haven’t paid your money yet. You have a grace period. When you get your credit card bill, you still have between a couple of weeks and a month before you have to pay. Even if you sign up for the automatic payment in full as I do, they will not deduct the money until the due date. If you call them immediately within this grace period, the disputed amount is removed from your balance immediately along with overlimit fee, you don’t need to send real money for it. So you still have your money during the investigation.

    “*and the article has no affect on how I view debit cards vs. credit cards, I can go find a similar article on credit cards.*”
    Have you read it? If not, how can you say?

    Oh, and it seems rather silly to keep 13K on a checking account instead on some high-interest saving.

    Sure there are place when debit cards make sense, but there is no arguing that fraud protection is stronger with credit cards. Obviously if you are of the type who overspends with credit cards, you shouldn’t use credit cards. Credit cards only provide advantage if you pay in full (or do arbitrage).

    “The kind of mistake you’re describing could also happen with a regular account out of which regular bill payments are made…should I not have a bank account because this highly unlikely type of mistake might occur?”
    Yes, but it is much less likely than when you use the card unless you specify your routing number and account number every time you shop on the web.

  14. 14
    r.o.t.e. Says:

    @ kitty

    I think you have missed the point of my two comments (and those of others). It’s clear that you prefer credit cards over debit cards, (honestly I could care less about that.)I’m going to go ahead and end this because I feel that this would be a waste of time to continue. You have given a lot of generalizations. Based on your experiences, I’m sure you have reasons for prefering cc. But chosing which card was not the point of my posts. I’m going to answer your comments and then I’m walking away.

    1. Yes I’ve had conversations with my bank and have read through the documentation they give you when you open up a new account. They have fraud protection program just like most major credit card companies. I also know that Surust, Bank of America, and Wachovia have similar programs. If you read my original comment, in my situation I said the bank removed SOME fees and the company paid for the rest. I called the other place where the payment bounced and they understood and I was not hit with any fees or anything. I’ve had two friends, one with a credit card and one with a debit card who have both been the victim of dubious charges and the results where the same from them.

    2. I’m not going to answer this because I’ve answered it already. You card company might be different from mines (and that of my friends.) so I truly don’t know what you know versus what I know. But I can say that I don’t know of any company (bank or otherwise) that you can call them up and say with out some form of documentation, “Yeah I didn’t make that charge on whatever date, so can you go ahead and take that off my card. Thanks.” And they do it no questions ask, I know for a fact it takes more than that. Fruad protection is evolving all the time for both debit and credit accounts but it hasn’t gotten to that point yet, there’s still a period of wait time, but again I don’t know how your company works.

    3. Yeah I did read the article and like with all other media coverage articles, written by people who are doing a job, I took it with a grain of salt. In fact I just found an article from Reader’s Digest that talks about new tricks and traps that the credit card companies are using to ruin peoples lives. So like I said for every ping you take a debit card…there’s one for credit cards, so the arguement is moot.

    4. You can’t say something is silly because you personally don’t subscribe to it. You don’t know what the interest rate is on their accounts and you don’t know the reasons behind doing it. To me it seems rather silly to say such a comment.

    5. I can so argue that fraud protection is not stronger with credit cards, see watch me: Fraud protection is not stronger with a credit card. It’s just as easy to get money off you with your credit card as it is to get with your debit card. But if you have protection for both cards, you can get your money back.
    I’m not saying it’s going to be easy but it is doable.

    6. That comment has nothing to do with me cause I didn’t make it. But for the record I agree with it because they basically said what I’ve said, a mistake like this is going to happen to any account be it credit card or debit card, the fact that both types were used from the clientele proves that. ( I don’t see how your answer actually address that statement. Going by your answer some of the credit cardholders should have been spared…I don’t think they were.)

    Okay I’m done, no more from me on this subject cause it’s gotten old, and I’m going to have to start repeating myself. But before I go, I would like to say I don’t appreciate your tone. It was very rude and ill-mannered. You spoke and assumed I had no knowledge of what I was talking about and that was not called for. In all the comments in which you have replied to in this post you have held a very condescending attitude. I think you missed the point of my comments. As of now my participation in this conversation is over with you can respond but I’m not going to read nor respond back.

  15. 15
    kitty Says:

    @r.o.t.c , “But I can say that I don’t know of any company (bank or otherwise) that you can call them up and say with out some form of documentation, “Yeah I didn’t make that charge on whatever date, so can you go ahead and take that off my card. ”
    Here is a quote from Fair Credit Billing Act http://www.ftc.gov/bcp/conline.....t/fcb.shtm : “You may withhold payment on the disputed amount (and related charges), during the investigation.” They can indeed apply it against you credit limit – my wrong – but this and the charges on disputed amount will be returned to you if you are correct and it is a fraud. The disputed amount itself, however, is still in your bank account whereas with debit card it is not there. This is the main difference. Also, while over-limit may be an issue for some people, it is less of an issue than having your accounts drained especially if your credit card utilization is low. Mine is under 5%.

    At any rate, I found this fairly impratial article that outlines the differences including those in fraud protection – http://myvesta.org/pubs/pdf/credit_or_debit.pdf

  16. 16
    kevin Says:

    Does the ad for Citi credit cards have anything to do with this post?

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