“I use my debit card for everything!”
If you use your debit card for everything, you are probably missing out. Not only could you be building a credit history, you could also be earning rewards. Also, by using a debit card instead of a credit card you might be missing out on some excellent protection credit cards provide.
“But I always pick Credit instead of Debit when I swipe my debit card!”
This does not make your debit card a credit card, and it does not give you the better consumer protections provided by credit cards. Instead, this just changes how the card is processed and may result in different fees for the merchant or for you. For details about what happens when you select “Credit” vs. “Debit” at checkout, see this Reddit thread.
Q&A Video: Should I Use a Credit Card or a Debit Card?
Using Credit Responsibly
Before you jump into using credit cards, it’s important to understand how to use them responsibly. There are many myths out there about credit cards, so understanding what’s fact and fiction is a great place to start.
Building Credit History, and Boosting Your Score
One of the best ways to build healthy credit reports and scores is through the use of properly managed credit card accounts. If you use your credit cards responsibly month in and month out then you can expect your credit scores to be positively impacted. Debit cards simply do not offer the same benefit since they are not reported to the credit bureaus. (Note: there is still a potential for debit cards to damage your credit scores if you overdraw your checking account and fail to pay the overdrawn balance back to the bank.)
Remember, good credit scores are an important investment for you to make as they can save you money on auto insurance, home owner’s insurance, utility deposits, cell phone deposits, auto loans, mortgages, and much more.
For young people looking to establish credit for the first time or for those who are looking to rebuild previously damaged credit reports, credit cards can be a powerful tool. If you are ready to begin building (or rebuilding) your credit then converting from a debit card to credit cards can be a great first step in the right direction.
Also, you can ignore the warnings of the “cash and carry” crowd who demonize credit cards and urge you to stick to debit card usage only. The truth is that poor credit card management, such as revolving a balance or making late payments, should be avoided. However, properly managed credit cards are a smart financial decision regardless of which financial “guru” tells you otherwise – and that is a fact.
Credit Card Protections and Benefits
Would you be more concerned about losing your debit card or losing your credit card?
Credit card users are protected by the Truth in Lending Act, which limits the consumer’s liability charge to $50. Debit card users are under the Electronic Funds Transfer Act, which holds consumers liable depending on when they report the unauthorized charge to the bank. If they report it immediately and haven’t used their card, they won’t be held liable. If they wait two business days to report it, they’ll be liable for $50. If they wait three business days to report it, they’re liable for $500, and if they wait 60 days, they’re liable for the entire amount.
In addition to the disproportionate fraud limits there’s something even more significant to consider. When someone steals your credit card and uses it fraudulently they’re NOT stealing your money. They’re stealing your credit card issuer’s money. When someone steals your debit card and uses it fraudulently they’re not stealing a bank’s money…they’re stealing your money.
The Consumer Financial Protection Bureau (CFPB), a government watchdog agency formed out of the Dodd-Frank Act, says that credit card users who have lost their cards or report them stolen will not be liable for any fraudulent charges on their accounts. But debit card users with lost or stolen cards must contact their card providers immediately to protect themselves from liability on any unauthorized charges.
The CFPB declined to comment on whether the Electronic Funds Transfer Act offers sufficient protection for debit card users. However, they did offer some advice on how consumers can protect themselves when they notice any unauthorized transactions on their accounts. This advice pertains to both credit and debit card holders and does not address the level of protection for debit cards.
Gail Hillebrand, of the CFPB, wrote that the organization had been getting a lot of questions from consumers about how to deal with Target’s data breach.
“This theft of credit and debit card information could impact tens of millions of consumers and we want to let you know what you can do to protect yourself if you spot fraudulent charges … If your information was part of a breach, the most immediate risk is that thieves may make unauthorized charges or debits to your accounts … The sooner you tell your provider about any unauthorized debits or charges, the better off you’ll be”– Gail Hillebrand
The CFPB recommends that consumers check their accounts frequently, whether online, on paper, or via mobile device, and sign up for email and text alerts, if their card provider offers them.
“Report even small problems right away. Sometimes thieves will process a small debit or charge against your account and return to take more from your bank account or add more charges to your credit card if the first smaller debit or charge goes through.”
She also cautioned people to stay alert, because thieves can make fraudulent charges or debits even months after a breach.
In addition to reporting unauthorized charges or debits immediately, the CFPB recommends that consumers cancel and replace their cards to prevent any additional fraudulent activity in their accounts.
“Even if you’re not sure that PIN information was taken, consider changing your PIN just to be on the safe side”
The CFPB says consumers who notice unauthorized transactions in their accounts should call the card provider’s toll-free customer service number immediately, follow up with a written letter, and keep a file of all written correspondence and the dates of any calls they make.
Also, consumers should never give their account information to any caller or email that acts as its bank or card provider, Hillebrand said.
Any consumers who don’t receive a helpful response from their bank or card provider should submit a complaint to the CFPB by calling (855) 411-2372, or (855) 729-2372 for TTY/TDD. They also may submit their complaints online at consumerfinance.gov/complaint.
Now, ask yourself the following question, and be honest with your answer. Would you be more comfortable having the bank’s funds or your own personal funds be at risk for fraudulent charges? We all know the answer to that question.
“Free” Short-Term Financing If You Pay Your Bill Every Month
When you use a debit card, the balance of the purchase is finalized and deducted from your checking account within a few days. When you use a credit card, you won’t have to pay until your billing cycle finishes and the statement balance is due. As long as you pay it off completely, you’re basically getting that month of delay between charging to the card and when the bill is due for free.
Possible Risk of Credit-Damaging Hard Inquiries in Some Cases
There have been some reports of merchants running credit reports when someone uses a debit card rather than a credit card. If a merchant or lender runs your credit report, you will most likely get a hard inquiry.
APR? Interest Rates? Balance Transfers? — Learn the Terminology
Credit card terminology can be confusing at first. Check out our glossary to get a handle on some terms, and if you’re still confused about something, just ask us!
Credit Cards Are More Convenient for Traveling
When you’re on the road, whether it’s for business or pleasure, using a debit card becomes problematic. First off, if your trip is going to set you back hundreds or thousands of dollars then you’re going to have to deposit that amount of money into your checking account, which places it at risk because of the fraud issuers explained above.
But perhaps the biggest problem when it comes to travel is the “hold” placed on funds by hotels, gas stations and rental car companies. A hold is when the merchant claims an amount of money in your account until the end of your stay or until the final cost of the transaction become clear.
For example, if you’re planning on staying at a hotel for 5 days and the bill is going to be $2,000 the hotel will hold that entire amount plus some extra for incidental charges. They’ll do this when you check in, not when you check out. The same thing happens when renting a car.
You’ll essentially have to come up with all of the money up front because they will hold the full amount when you drive off their lot. Gas stations do the same thing when you pay at the pump. There’s a station by my house that holds $120 every time I pay at the pump despite me never buying more than $50 in gas. After a few days the pending charge is changed to the exact amount.
Want to find a credit card?
To start your search, head over to our main credit cards page.