For those who have ample funds in the bank and want a foolproof way of protecting oneself from a mountain of unmanageable debt, the choice is a no-brainer: debit cards are better than credit cards.
But, before you go and totally write off credit cards forever, here are some important truths you should know about using debit cards versus credit cards.
1. When fraud strikes
By law, with credit cards, you are liable for only up to $50 of fraudulent use – period. However, most credit card companies will boast a $0 fraud liability policy. In other words, you will never be responsible for any unauthorized transactions with a credit card.
It’s a different story for debit cards. Your financial loss is limited to $50 only if you report the theft of your card or PIN code within two days upon learning of it. If you make a report between 2 to 60 days of the incident, your liability could jump to $500. Report the incident any later than 60 days and you can be responsible for the entire loss that resulted from fraud.
Even if you do get your money back, it’s going to be a headache — as you’ll see in the next point.
2. Dealing with the hassle of merchant disputes
While in the process of settling questions on purchases made, you would be more at an advantage if you used a credit card for that particular transaction.
You lose immediate access to your money when you swipe your debit card, whereas you’re borrowing funds temporarily when you use a credit card.
If you had to dispute a charge on a debit card, you won’t see that money until it is returned to you. It could put you in a bind if you needed that money for other things, such as rent or utilities.
There’s no such inconvenience when you dispute a credit card charge. You can rest easy that the money in your checking account can still be used for whatever you want.
3. Businesses that over charge (temporarily)
You probably know what an “authorization hold” is if you drive or stay at hotels often.
What happens is that if you use your debit card in a gas station for instance, the establishment puts a certain ‘hold’ or ‘block’ for an amount on your account, typically about $50 to $100. Even if you only use up about $20 of that, it would take a few days for the blocked amount to be accessible in your account again.
The same is true for service companies that require certain deposit such as a car rental service. A $40 rental fee could have your debit card put on hold for $300 more as deposit. Even when the car is returned, the $300-hold is not lifted right away; try 3-5 business days. This could result to overdraft problems in your account if you have allocated these funds for some checks, causing you to incur penalty charges.
Again, with credit cards, this isn’t an issue.
4. The more rewarding card
In recent years, debit cards have lost their ability to generate rewards for card customers. Therefore, credit cards tend to be more attractive because they can dole out spectacular rewards based on your spending.
If you’re going to spend anyway, wouldn’t it be wiser to be rewarded for it? Obviously, we do not condone a rewards credit card for anyone who doesn’t pay off their balances every month. But, if you can pay that monthly credit card debt, a rewards credit card is the smarter choice.
5. Effects on your credit scores
Your debit card activity is not indicated in reports to credit agencies much like those from credit cards are.
In other words, whatever credit-worthy habits you have will not be reflected in your credit score if you stick to using a debit card. Remember that the credit record plays an important role in your financial life and any opportunity to build up that score shouldn’t be passed up.
6. Card perks galore
Care for free travel insurance when going on a trip or extended warranty for purchased items?
These may be standard services for credit cardholders but most debit cards users don’t get to enjoy as much. For online purchases especially, getting a replacement or a refund for items that arrive broken or defective, can prove to be more difficult when using a debit card.