These days, opening your wallet will probably reveal at least a handful of credit and debit cards. You might think it doesn’t matter which plastic you choose to use for any particular purchase, but there are actually distinct situations in which you should choose one over the other.
Fraud Liability Differences
Under federal law, consumer liability is limited to $50 for both debit cards and credit cards. In the case of debit cards, however, the card’s theft or loss must be reported within two business days. As the popularity of debit cards surged, VISA and MasterCard extended consumer protection by requiring card issuers to offer zero percent liability in the event a cardholder would fall victim to fraud.
Although federal law and card processors attempt to regulate the security features that come with credit cards and debit cards, card issuers usually provide additional protection to credit cards because they represent a larger pool of revenue. Perks such as price protection and extended warranties sway some consumers toward using a credit card over a debit card, contributing to the conventional wisdom that credit cards are safer than debit cards.
The Constraints of Debit
Credit charges have an advantage over debit charges due to the flow of money during a purchase transaction. When swiping a credit card, the amount of the purchase is held as borrowed funds and posted two to three days after the purchase date. With a debit transaction, funds are instantly transferred out of your checking account.
If your card, whether debit or credit, is lost or stolen, unauthorized purchases are eventually refunded. The problem arises when that card is a debit card and your checking account remains empty as your bank works to return your cash. Any checks or scheduled bill payments would bounce and leave you strapped for cash, perhaps causing unnecessary stress.
Should You Pay With a Debit Card or a Credit Card?
Debit cards are great for consumers who want to closely monitor their spending. Because the money spent comes directly from a checking account, debit cards create more awareness of a consumer’s spending habits and overall financial situation. If use of debit cards is a must, it is best to limit them to small purchases where you receive what you paid for on the spot.
In general, credit cards offer greater protection from fraud, making them the favorable choice in most cases. For example, with a credit card, you’re only responsible for up to $50 of fraudulent charges. It’s the same with debit cards only if you report the loss within two days; otherwise, you’re liable for up to $500. In these cases, you can wait for your credit card company to resolve the matter without having to lose any money, whereas any debit card charge immediately deducts from your bank account, and you could be left waiting for weeks with an empty account before the bank restores your funds.
Also, great reason to use a credit card is that it earns rewards and cash back while most debit cards don’t offer such programs. Credit cards play a significant role in building good credit. Therefore, credit cards are ideal for expensive or online purchases.
With that in mind, here are some instances in which it would be better to use your credit card:
Using a debit card will not help improve your credit.
Credit cards provide more protection should you be dissatisfied with a purchase and need to dispute it with the merchant.
Debit cards occasionally offer rewards, though it’s much easier to find great rewards programs with credit cards.
Online purchases and Future Travel
This is another safety issue; if somebody manages to acquire your debit card information via a security breach, your bank account could be drained instantly and for an extended period of time before you recover the stolen money. Using a credit card while traveling is also safer than using a debit card.
Gas stations or hotels
These establishments regularly “block” a higher amount on your card of payment than what they initially quote because they don’t know how much you’ll ultimately spend. This block usually goes unnoticed on a credit card but could temporarily freeze the funds in your bank account.
When insurance is needed
Some credit cards include a limited form of insurance, so it’s a factor worth considering though the policies typically cover very specific cases.
Conversely, there will be times when pulling out your debit card will be more advantageous. Using debit will likely allow you to be more budget-conscious.
Laura is a staff writer for MyBankTracker. She covers personal finances, millennials and consumer spending.