8 Reasons Credit Cards Beat Debit Cards

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Debit Card hologramThis may be sacrilegious to say, as a personal finance blogger, but I’ve never been a fan of debit cards.

I’m biased though. I think I prefer credit over debit because because I’ve never been in credit card debt. I’ve never been on the business end of the tactics used by the credit card industry. I credit to a fear that my mom would be angry with me, rather than my own self-restraint, but either way I have never paid a penny of interest to a credit card company. 🙂

That being said, here are eight reasons why I think that credit cards are better than debit cards, which I hope you’ll enjoy arguing with me in the comments!

Reasons Credit > Debit

  1. Fat Finger Miskeys: Since a debit transaction immediately reduces your account balance, a cashier mis-keying in your purchase can have a devastating effect on your finances. It’s not unheard of for a cashier to key in $495.00 instead of $4.95 when they’re under pressure, tired, or stressed. When that happens, it can take days to unravel and by then you could have checks bouncing, your cashflow gone, etc. On credit, it’s not a big deal to reverse a charge temporarily.
  2. Blocking: When you fuel up at a gas station with a debit card, the station will put a block of $50 on your card, even if you put in $5. It’s because they don’t know how much gas you’ll be buying so they have to lock up the maximum amount. This block isn’t released until the gas station batch processes its pump transactions, which MSN says could be several days (see #4).
  3. Renting a car on debit can cause headaches: Renting a car with a debit card can be a huge hassle and the same blocking issue happens, except on a much larger scale. Instead of $50, think $500 and the release is often a week after you return the car.
  4. Overdrafting is still possible (and expensive): A big argument for debit is that it helps you manage your spending, you can’t spend more than you earn right? Well many debit cards now let you spend more than you have in the account and hit you with an overdraft fee.
  5. Slightly weaker fraud protections: Credit cards offer very good fraud protections whereas debit cards offer a slightly weaker set of protections. For example, you are only liable for $50 of credit card fraud if you discover the loss/theft of a card after the fraud occurs. With a debit card, if the loss of the card is reported within 2 business days, it’s only $50. After 2 business days, it’s $500. After 60, you are completely liable. You can read more about how they different on my foundation post about Credit and Debit cards.
  6. Most debit cards don’t offer rewards: Some debit cards do offer rewards but the vast majority don’t, since debit card transactions are usually very cheap (think a flat fee of 15 cents). With the fees so low, there’s no room for rewards.
  7. You don’t build credit: This is a pretty obvious negative about debit cards and might not be something you care about if you swear off credit as a whole (though there are several ways a bad credit score can hurt you outside of borrowing money).
  8. Warranty benefits: When you purchase something on a credit card, the credit card company often gives you a warranty benefit that doubles the existing manufacturer’s warranty up to a year. Debit cards don’t usually offer this.

However, one thing can’t be contested, it’s very very difficult to get into credit card debt when you only use debit cards and cash. I can’t dispute that. 🙂

Let’s discuss this, shall we? What do you think? Did I miss a reason? Is there a bigger reason why Debit > Credit? Let me know!

(Photo: neilt)

{ 52 comments, please add your thoughts now! }

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52 Responses to “8 Reasons Credit Cards Beat Debit Cards”

  1. Patrick says:

    Debit cards are occasionally nice, but I agree with all of your points on the benefits of credit cards. Almost every store now accepts both credit and debit cards. It just makes more sense to use a credit card if you can control your spending habits.

    • Andrew says:

      My credit union requires me to use my debit card 10 times per month to get a decent interest rate on my money, so I use it for small transactions where I would have otherwise paid cash. For anything major, I use my Alaska Airlines mileage credit card. For groceries, drugstores, and gas, I use my HSBC DirectRewards card (5% back).

  2. Gene says:

    Amen. Plus if you pay your balance every month, you get the benefits of both.

  3. prufock says:

    I long ago gave up using my debit card regularly. I don’t even carry it any more. I keep it in my wallet, which sits in my car since I don’t carry THAT any more either (I hate carrying a lot of stuff in my pockets). I only use it when I need to take out cash or actually go to the bank. Otherwise, I carry my credit card and cash, in my pocket. Pay with cash when possible, otherwise use the credit card and pay it off online as soon as I get home.

  4. Caitlin says:

    Re #1: Seriously?
    If people paid attention to the little screen, it would never happen.. The cashier hands it to you, and the first thing it asks you is to confirm the dollar amount. If the cashier mis-keys, and you approve it, you’re both at fault, not just the cashier, and not the card itself.
    Same for overdraft. “They both let you overdraw” is not an argument for credit cards, it’s an argument against both credit and debit.

    I find both have their uses, and each one is better than the other for certain instances. Though to be fair, the instances are tending to shift more toward credit cards, but only due to the “no signature” touch pads they now have, that allow credit cards to be as fast (and faster!) then credit cards.

  5. Craig Ford says:

    I find accounting with a debit card a little harder. When using the debit card I need to think did that money transfer into the account already or is that tomorrow. Then I get nervous wondering if the right funds are in the right place. But, I guess the truth is all of these negatives might stop you from using the card while the cc is so convenient you might spend money you don’t have.

  6. Mark Wolfinger says:

    Good advice.

    My little rant: The banks are disgusting. They charge high fees for everything – and make so much money from those fees, it’s probably (these days) their major income source.

    I refuse to let them gouge me. Thus, no debit card and that means no errors that may result in an overdraft fee. I will not pay those bloodsuckers.

    • kitty says:

      The banks also
      – lose money when people don’t pay their debts. Current credit card default rate is 10%. Some of the money earned on interest and fees goes to cover losses.
      – allow credit card users grace period i.e. give them short term loans interest-free. If you pay your balance in full you don’t pay any interest or fees
      – allow automated payment of the full balance. If you sign up for this, you are guaranteed to never have to pay any fees or interest – as long as you have money.
      – provide loans to small businesses and homeowners
      – hire a lot of people. Some of this interest and fees goes toward paying salaries and rent.

      Really, think about it. Assume 10% loss rate. Under which conditions would you be willing to lend your own hard earned money without any collateral? Go further. Differenciate between customers – a group of customers with 0% probability of default and a group with 20% probability of default. Calculate how much interest you’d need to charge to get even.

  7. I see a lot of people use debit cards and not get a receipt for the transaction.

    I’m sure these folks have a great memory and will record the transaction in their checkbook when they get home …

  8. Jesse says:

    My wife and I use our credit card for nearly every purchase we make. Too keep ourselves from overspending, we use a system that makes our credit card mimic a debit card.

    To achieve this, we set up a sub-account on our main credit union account and named it “Credit Card”. Whenever we make a purchase on the credit card, we transfer the purchase amount out of our checking account to the aforementioned Credit Card account.

    When the credit card bill comes due, we just pull it out of the Credit Card account and pay the bill. Using this method in conjunction with a well monitored and maintained budget assures that we never carry a balance on our card and never have to worry about where the money to pay the credit card bill is going to come from. Works like a charm.

  9. Tyler says:

    I’m a firm credit card believer, mostly for the protection purposes, mostly concerning fraud and the availability of my money as it is being sorted out. Like Jim, I’ve never had a problem with credit or spent more than I had, so I cannot argue against it from that perspective, though it is certainly a valid one for those that have had such an issue in the past.

  10. Personally, I’m a debit card guy. Yes, credit cards may be better if you have the discipline to pay them off every month, and take advantage of the rewards programs, but I suspect most people don’t and find the primary benefit to be the easy ability to extend the paycheck. You only need a few months per year of paycheck extensions to find yourself in a negative situation.

    That can’t happen with a debit card. In fact you can’t overdraw the card, the purchase will be refused if there are insufficient funds to cover.

    The other benefit is that you can’t quietly, unnoticeably run up a balance on a debit card. If forces you to live within your means, which is a good discipline for most people.

    Also, there’s less likelilhood of opening up your statement at the end of the month and finding a charge (or two or three) that you forgot about. For simplicity of finances, a debit card is the way to go–money in, money out, no tails attached.

    • Andrew says:

      First of all, nothing will protect you if you lack financial discipline. Most banks will allow you to overdraw your checking account using a debit card and will charge you heavily for the “privilege.”

      I check my credit cards online just about every day, so if an unauthorized charge show up, I know about it PDQ.

      • kitty says:

        This is right. Additionally, if you set up automated payment in full on credit cards, you’ll get the benefit of both: knowledge that the money will be taken from your account and extra protection and grace period that credit cards offer.

  11. Master Allan says:

    Not everyone takes my discover card and my backup visa debit just wasn’t cutting it. I replaced that visa debit with an amazon visa credit card instead. Never heard of a merchant that does not take discover and/or visa. I missed out on a few thousand dollars eligible for rewards over a year when forced to use debit. No longer with credit.

  12. Mark Wolfinger says:

    KEVIN: “That can’t happen with a debit card. In fact you can’t overdraw the card, the purchase will be refused if there are insufficient funds to cover.”

    That’s no longer true. And the banks depend on customes believing it’s true.

    Make no mistake about it – the banks are out to cheat their customers. That’s where their income is derived.

    Today, all banks ‘extend the courtesy’ of lending you the cash to allow any debit card purchase you want to make.

    Then they charge an overdraft fee – approximately $30 – for extending that ‘courtesy’ to you.

    It’s a major scam. Are you certain your bank will decline the debit card if there are insufficient funds?

    • Mark & Andrew–You’re (Andrew) absolutely right on the financial discipline issue. No discipline = you’re sunk no matter what method you choose. But just in case my discipline fails–which it can for anyone under the right circumstances, eliminating temptations can kick in where the knees go weak.

      I don’t use overdraft with my account, that’s just another form of extending the paycheck IMHO. You can refuse to add it–I did, even though the bank encouraged it. Overdraft turns your checking account into a short term credit line. Sometimes you just have to say NO upfront, which is part of the discipline.

      Some people are into checking their accounts on a regular basis, not just credit card accounts, but I doubt most people do. For simplicity (so I don’t have to check so frequently) the debit card/no overdraft works better. For me, simple generally works better.

      Yes, cc’s have more rewards, but it’s worth noting that those benefits are for the purpose of encouraging greater use of the cards, not because the banks are being neighborly and just want to help! Again, I’m saying NO to that upfront, which removes temptation later.

      Isn’t it cool that cc’s work for you, and debits work for me, and we can both use the method we like best? One isn’t better than the other on an absolute basis, and we should find what works best after factoring in personality, circumstances and preferences. As is said in the accounting world, “it isn’t always all about numbers”.

      • Andrew says:

        Just because you don’t have overdraft protection doesn’t mean your bank won’t let you overdraw the account. It just means that instead of a small fee and a little bit of interest (or a transfer from savings to cover the overdraft), you’ll be hit with $30 per transaction.

        I never suspected banks of being neighborly and wanting to help. 🙂 I’m not tempted to put more gas in my car because I save 5% on it. My car only holds so much gas. I just use that card rather than using another card or cash. I do fairly little discretionary driving, and it hasn’t changed much over the years. Lack of free time and tons of fun things to do at home are more of a constraint in this area than gas prices or credit card rewards.

        As for discipline and whether it might slip, I think this is unlikely in my case. I’m not emotionally attached to money; it’s just a means to buy the things I need and want. My wife and I both make a good living, and we don’t spend that much of it, since most of the things we enjoy doing are inexpensive. So living beyond our means really isn’t a temptation.

        One thing to keep in mind is that if you keep thousands of dollars in a non-interest-bearing account just to be sure you never overdraw it, you’re losing out on the opportunity to invest that money in something that would provide a return, so that is costing you money. My bank stopped reimbursing my ATM fees unless I kept $5K in checking. I could do so, but I would lose about $100/year in interest, so I changed banks.

        It’s very cool that we can each choose the method(s) that work for us. I just think that sometimes people stick with what they know and are afraid to try something new because they’ve always done it a certain way. As for it not always being about numbers, I tend to disagree. I manage my money so that I will have more of it rather than less. Some ways of tweaking an extra $50 out of “the system” would cost me more than $50 of my time, so I don’t do them, but it’s a financial decision, not an emotional one.

        I’m very fond of emotions, but not when it comes to managing money.

      • Most banks have a “courtesy overdraft limit” on your debit card, which is separate from accepting or refusing overdraft on your checking account. For example, almost all Wells Fargo debit cards come with a -$10 limit, which is just enough to get you eating about 4 overdraft fees if the purchases hit right.

        So if you’re going to insist upfront that you have no overdraft, make sure your banker also turns off the amount your debit card will authorize in the negative as well. It’s still no guarantees that you won’t overdraft with your debit card (due to floating $1 charges for gas, iTunes, and a few other anomalies), but you’ll be somewhat safer.

  13. Carla says:

    I never had the “blocking” experience before when I buy gas. Maybe this is only in certain states or banks?

    I must add that credit cards are more secure than debit in some ways. If someone stole your debit card or debit card number, they can clean our your checking account. You will get it back from your bank eventually, but if that’s your bread and butter, you’re screwed for those several days. I had that happen to me years ago when ex roommates decided to go on a shopping spree with my debit card number. I got the money back, but I ended up bouncing a few checks and pissing people off in the process. I did get all of my money back plus damages (bounced check fees and insufficient funds penalties) about a week later. This was in 2002 with Bank of America.

    With that said, I still prefer to use debit for most purchases, but I do have credit cards that I use as well.

    • StephaniePTY says:

      As to the blocking issue, it isn’t necessarily certain states or banks so much as it is different gas stations. Sunoco used to never do blocking, now they do. If you visit the same gas station most of the time, and it’s a gas station that doesn’t use blocking, you might never have it happen to you. It’s an important thing to know about though, especially if you go on a trip and will be using other gas stations.

  14. I agree with all the points you have mentioned. I like the fraud protection of the credit cards. I am like you, I have never paid credit card interest but I am disciplined and hence use credit cards for all my purchases.

  15. Liko says:

    I’m arguing for debit cards:

    1. Fat Finger Miskeys: My debit card account has multiple levels of protection against overdraft. If my checking is low it will take money from a large emergency savings account, if that’s low, then it will take money from a large line of credit. If that’s low than I’m probably drunk. None of which will inquire a single dollar in fees. I love credit unions!
    If I go over on my credit card I’m screwed. I don’t have any protection. I get charged a whopping fee and risk my credit score to dive for borrowing past my credit limit. I also risk getting slapped by a 28% interest rate too (that’s happened to me before).
    The risks are too high for over drafting on credit cards. Debit card wins!

    2. Blocking: I never noticed this and I check my account daily. But even if it has, it’s never been a problem. Maybe it’s because a typical gas tank costs $50 to fill up. I think this is a non isssue. Tie.

    3. Renting a car on debit can cause headaches: I’ll rent a year once a year, so this is not that big of a deal, but even then, I use my debit card and haven’t had a problem, the company I use is the cheapest and they never charged me anything in addition or put a hold on my account. But I guess some places, like Hertz, want to deal only with credit cards. I hate Hertz anyway; they charge an arm and a leg! So I don’t do business with them. Ok, ok, credit card wins this issue.

    4. Overdrafting is still possible (and expensive): If your checking, savings, and line of credit is setup right through a credit union, then over drafting is free (see #1). Over drafting on credit cards can be very expensive though! Protection on debit is free; protection on most credit cards is not. Also it can hurt your credit score. People that use credit cards should care about credit score.

    5. Slightly weaker fraud protections: According to Mastercard’s and Visa’s websites, both debit and credit cards come with the same protection. In addition, debit cards come with your banks protection as well. When my debit card was charged 3 times in an online purchase, my bank refunded my money back within 5 minutes while they straightened this out. I think I’ll take the extra level of customer service and protection.

    6. Most debit cards don’t offer rewards: Some debit cards do offer rewards too. And according to a recent study 70% of credit card rewards are never claimed or ever fulfilled. In addition, who want’s a program that encourages them to spend more. I won’t a program that discourages me from spending. According to a study, credit cards with rewards spend 12% -18% more than debit card / cash users. Credit card users can keep their 1%, I’ll keep my 12%. Debit wins for me here.

    7. You don’t build credit: True, but there’s other ways to build credit too. You also don’t build debt either! Most people do not pay off their credit cards every month.

    8. Warranty benefits: I don’t know of a single person that has ever used this feature! I rarely use the Manufacturer’s warranty.

    • Joe says:

      1. I’m not a member of a credit union.

      2. When gas was $4 a gallon in CA, it was really easy to go over $50.

      4. refer to answer 1.

      5. The idea of missing cash out of my bank account and losing a few days of interest doesn’t excite me.

      6. I’ve flown round trip to Shanghai and Seoul twice. I also stayed at a Westin hotel for 3 nights for free. That’s at least $3000 in benefits. My gas card deducts 5% of my gas bill every month. Only 1%?

      7. Most people are not wealthy.

      8. In addition to warranty benefits, my credit card has a loss/theft provision, which I’ve used twice. Once for a pair of sunglasses stolen at the beach and a digital camera. That’s around $500 in benefits. Which debit card offers this service?

    • trumpet-205 says:

      5. Slightly weaker fraud protections: According to Mastercard’s and Visa’s websites, both debit and credit cards come with the same protection. In addition, debit cards come with your banks protection as well.

      WRONG. In order for debit card to receive zero liability protection, transaction MUST be processed through Visa or MC network. This can only happens when you select credit at PIN pad then swipe your debit/check card.

      Problem is that most retailers (in-person purchase) configured their PIN pads so that it process debit/check card through bank’s network (Plus, Star, other logos on the back of your debit/check card). Retailers do this because bank’s network charges less interchange fees than Visa/MC network.

      You got your money back because purchases are made online. Online retailers process all debit card through Visa/MC network to have assurance and speed up the process.

      Remember, it MUST be processed through Visa or MC network in order to have zero liability protection. Banks and CUs are not obligated by law to cover fraud should it processed through its own network. It all depends on the bank and/or CU.

  16. Patty says:

    I have many of the same concerns you listed for debit cards. However I just opened one of those reward checking accounts that require me to use their card 10 times. I only use it the 10 times for minor purchases, always choose it to be credit not debit (hoping that protects somewhat,) always get a receipt and put that in envelope designated for these receipts, check how it shows up online, sock drawer it once I use 10 times til next month. It’s funny how when you use it for these minor purchases (coffee, newspaper, snack, milk) the vendor assumes you don’t want the receipt, and they scrunch it up and discard it. I have to specifically request it so I have a hard copy record of the transaction and this habit makes me verify it is for 1.50 not 150.00

  17. Tizzle says:

    #2: In my experience, gas stations only check for $1.00 before allowing you to pump gas, with both credit and debit cards. This lets you get gas if you only have 5 bucks in your account and a paycheck coming tomorrow*. Also, debit cards can work as credit cards, so at the gas pump or grocery store if you push ‘credit’ not ‘debit’, then it takes 2 days for the money to go through your account. You still have to have all the money in there, and I believe if you call your bank you can tell them not to allow you to overcharge, but I’m not sure. My credit union does not try to screw me; I’m pretty sure my bank would. I’m careful.

    @Kosmo: I don’t always get receipts, and I don’t keep a checking ledger. I keep the days money in my head, and check my account every day online.

    My only real argument for debit is that the cheap gas station in my state (WA) doesn’t take credit. The difference in price is often $0.20, which makes up for the 45 cent fee they add to use it (I try to use cash). Obviously that’s personal to me. I’m not against credit per se, but I don’t have much, and until I do, it’s moot.

    *I no longer do these things, but when you’re unemployed, well, stuff happens.

  18. eric says:

    You might get a lot of hate (strong anti-credit crowds)….

    but, like you, I would take credit over debit ANY day. 😀

  19. Beth says:

    Great points, but you forgot one thing: you can dispute credit card charges within 60 days. A lot of advice about avoiding travel scams recommends booking travel with a credit card rather than paying cash, debit or cheque. And if your travel company goes out of business, you have some hope of getting your vacation dollars back. (Otherwise, you’re bottom of the list when it comes to discharging the company’s debts).

  20. So maybe the answer is using debit cards for the little, routine items (to avoid running up cc balances) and to use credit cards for major purchases where you might need protection (travel, major purchases, etc.).

    Personally, I have both, but use the debit card to avoid the temptation to use credit to extend the paycheck, and mostly leave the credit card at home.

    However, for online purchases, I’m now using PayPal–no need to enter your cc information for each purchase, cutting down on the likelihood that my info will fall into the wrong hands.

    • Beth says:

      I use gift cards for online shopping if possible. I figure out what I want, buy the gift card in the store and use it online so I don’t have to share my info.

      • Beth–That is brilliant! No sales tax, plus a lot of online retailers waive shipping costs if you buy above a certain minimum.

        • Beth says:

          Alas, it doesn’t get me out of paying tax (PST and GST) when I purchase the items! I do find I’m less likely to impulse buy if I have to take this extra step — it offers a cooling off period.

          The grocery stores and drug stores up here sell gift cards, so I sometimes cash in my reward points for them.

    • lark says:

      I’m not pleased with Paypal right now. I’ve never had anyone misuse my credit or debit accounts without having possession of the cards for those accounts, but there have recently been some very weird transactions in my Paypal account. Paypal may be generally more secure but not in my case.

  21. Other than some minor degree of convenience that puts you at risk of overdraft and identity theft, what’s the benefit of using a debit card over cash? If you’re going to pay in cash (which you do electronically whenever you use a debit card), why not pay in cash? Then you know you’re not going to overdraw your account with a purchase at the grocery store or the Circle K.

    Personally, I don’t carry cash because it slips through my fingers like water and because it leaves no paper trail. I use a credit card because of the various protections a credit card offers, the documentation of purchases in not one but three forms (receipt, credit card statement, Quicken), and the convenience (these benefits aren’t worth it, of course, if you fail to pay off the balance each month).

    If for some reason I decided not to use a charge card, I would use my monthly discretionary budget to buy a cash card at Costco and “gift” cards at the merchants where I shop regularly. These have the same disadvantage as cash: when they’re lost or stolen, they’re gone. But since the same thing occurs with cash, there’s really not much difference.

    BTW, in theory you’re supposed to pay your state tax on stuff you’ve bought online from out-of-state vendors. Our state calls it a “consumption” tax and says the buyer is responsible for paying it. Not likely anyone is ever going to catch up with you…but in the unlikely event that your state tax collectors decided to audit you, they’d make you cough up the tax, plus penalties and interest.

  22. You forgot another killer — if you go to a restaurant, they often hold an extra 10-20% on your card for any possible tip you may wish to write in. This also isn’t updated until the merchant batch processes their receipts, which can also take days.

    I know it doesn’t sound huge, but in my past life as a customer service rep at a bank I saw it a lot.

  23. Great post! I was aware of most of these, but learned a thing or two. Thanks for sharing.

  24. barbara says:

    Just finished paying off $40K in credit card debt. My family has a credit card for emergencies, but I have never touched it. I pay cash, use my debit card or do without. I treat my debit card like a checkbook and record the transaction immediately so I don’t forget.

  25. Casey Johnson says:

    I found a way to MAKE money with credit cards. No, I’m not nuts.

    But there’s caveats on how to do this. First of all, you gotta stick to a budget. STICK to it, don’t splurge too much. Secondly, PAY THE ENTIRE bill once it comes due. If you cannot do either caveats, you’re screwed.

    If you use credit cards constantly, your cash sits in your bank account longer, amassing more interest earnings. With debit cards, you eat away at your cash a bit, thus earning less interest…

    The effect of this gets more dramatic the higher the interest your earn.

    The low interest rates paid nowadays sure suck and I don’t earn much nowadays. But play with your average earnings and spendings, assume 5% interest rates and you will see how much indirect money credit cards actually make you.

    If this is already well known, I apologize. But I have to say, I never see anybody mention this nice fact about credit cards.

    – Casey

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