Why Debit Cards Are Better Than Credit Cards

By glblguy

Rewards Cards

Yesterday a couple of credit card related articles showed up on Get Rich Slowly. One article was by JD himself and had a few people surprised, the other by a guest. Both articles have caused quite a bit of conversation in the comments.

As my readers know, I hate credit cards and am a strong advocate of debit cards. It seems a number of people agree with me as a recent TNS Financial Services Consumer Credit Card Program Study indicated that over 60% of consumers prefer using debit cards to credit cards as a payment vehicle, because using debit cards feels more like “real money.” Debit cards are also gaining in popularity for online purchases as well. Based on data from JupiterResearch in American Banker, debit cards will account for 46% of all online purchases by 2010, compared to 41% in 2006. The same data forecasts a decline in credit card use to 35% of all online purchases in 2010 from 41% in 2006.

You are spending your money

A debit card is directly linked to your bank account. It works very much like paying cash or like writing a check. If you want to buy something for $100, you have to have $100 in your account. When you swipe your debit card and enter your PIN to purchase something, the money is electronically deducted from your account. Depending on your bank, the transaction may or may not show up immediately, however the funds will be immediately “held” and that hold will be reflected in your available balance.

I bank with Wachovia and have found that 90% of my transactions show up in my online checking account register within a few minutes of making a purchase. The remaining 9% show up in under the “Check Card Holds” link. Very few if any don’t show up the same day.

You aren’t getting a loan every time you buy something

Let’s be honest here, when you get approved for a credit card, you are being given a card that gives you access to a line of credit, a loan. Each time you use your credit card, you are borrowing (Proverbs 22:7) money from the credit card company. Granted, if you pay off the balance in time, you don’t get charged interest but you are still borrowing money.

They are more secure

How many times have you purchased an item with a credit card, signed your receipt and the merchant never verified the signature or checked your ID? I cannot count the number of times this has happened to me. How did they know I was really the card holder? They didn’t. With a debit card, your PIN is required. To be fair, a debit card transaction can still be run as a credit card transaction and require a signature, but I have seen more and more merchants detecting the type of card you are using and automatically defaulting to a debit transaction if you are using a debit card. I think this trend will continue. Merchants prefer PIN based transactions, as it reduces their risk and costs them less in service fees.

Here are some common myths related to debit cards:

Myth: They don’t provide the same level of protection as a credit card.

Reality: Credit cards are protected by the The Fair Credit Billing Act and debit cards are not. Policies instituted by banks do* can give you the same* similar levels of protection. While not law, I don’t expect these policies to change given the number of people migrating to debit card use. For those of you that may not know, The Fair Credit Billing Act basically means you have zero liability for fraudulent purchases, poor-quality or damaged merchandise, or for merchandise that was never delivered.

Also, debit card transactions can be disputed just like credit card transactions. In my past experience with this, I always received an immediate credit to my checking account for the amount in dispute.

Myth: Debit cards don’t provide rewards

Reality: A number of banks now offer rewards programs with their Visa card. As I said earlier, I bank with Wachovia and get rewards each time I use my debit card.

Don’t ever forget, credit card companies are in business to make money. They want you to screw up, they want you to pay only a portion of your balance, they even want you to pay your payment late or go over your credit limit. When you do these things they make money through interest, fees and even by increasing your interest rate. They won’t forgive and won’t let it slide. This is the whole reason they gave you those rewards in the first place, in hopes you would screw up.

The credit card proponents will say, “so don’t screw up”. Well, we are human, that happens once in a while. Plus, you have a whole company of people working to find ways to increase your chances of screwing up.

Life is stressful enough without adding the worries associated with a credit card. Buy things with your money from your account and don’t be servant to the lender (Proverbs 22:7) even for 30 days just to get a “free” toaster or some “cash back”. Nothing in this world is free, don’t let the credit card companies make you think otherwise.

* Since writing this article, I have changed the content based on a really good and informative discussion in the comments below. At the time of writing, I incorrectly assumed that all banks had similar policies on providing credit card “like” protection. Thanks to the information provided by a few readers, it would seem this isn’t the case. It was never my intent to misinform my readers and hopefully this will clarify the article. Thanks in particular to Justin and MITBeta for being diligent and  patient while we worked through this discussion and for keeping me accurate and honest!


41 Responses (including trackbacks) to “Why Debit Cards Are Better Than Credit Cards”

  1. Justin Says:

    So, you claim it’s a Myth that debit cards don’t provide the same protection as credit cards, then go on to prove that it’s not a myth.

    Just because some banks have policies similar to the credit card laws for the debit cards they issues does not mean all banks and other debit card issuers must abide by a law stating they must, or even adhere to their own policy.

    Also, if your debit card linked account is emptied, according to Visa and MC, the bank has 5 days to replace the missing funds. In that time how many other payments and checks will be returned. Will the bank own up to that? Are you sure? Are you willing to bank on that?

    With a credit card your money is never tied up when an issue arises, it’s the banks.

  2. plonkee Says:

    In response to your objections to credit cards:
    I treat money spent on the credit card as spent out of my account and maintain my own system separate to the banks, so it doesn’t matter that it hasn’t actually left my account yet (since it only benefits my cash flow position).

    As a non-believer I am not of the opinion that because something is in the bible it therefore applies to me (as in it may, it may not). So I don’t have a problem with an interest free loan.

    Credit card use in the UK requires a pin, in exactly the same way as debit cards do, so that argument doesn’t apply. Large items (costing more than £100) are explicitly protected if you use a credit card but not a debit card.

    We do have debit cards that provide rewards, but the interest on my current account with reward-free debit card is better than that on a current account whose debit card has rewards. Therefore it is more lucrative to take out a high reward credit card and pay off the balance in full from a high interest current account.

  3. glblguy Says:

    @Justin – Thanks for the reply and for offering your perspective. I don’t think I proved it isn’t a Myth at all. Policy or Law it doesn’t matter as long as it is upheld. I would challenge you to find a bank that doesn’t support these policies with their debit cards.

    If your bank doesn’t, than change banks. I would also argue that if it is indeed policy than they must abide by it. Granted though can change their policy.

    The bank may have 5 days, but my experience has shown the credit is almost immediate. I have had 3 fraudulent charges on my debit card over the years and in every case received immediate credit. Am I sure, no, I am sure enough, yes. Regardless, I have enough in my emergency fund to cover myself if they take longer anyway.

    With a credit card, your money isn’t tied up because it’s not yours, somebody else’s money is tied up. I personally am not comfortable with that.

    Sincerely, thanks again for offering your insight. I firmly believe it offers value to the readers when other thoughts and perspectives are shared.

  4. glblguy Says:

    Plonkee, that’s really interesting about credit cards in the UK. I didn’t know that. For me, it’s not really the bible that causes me heart burn about getting loans. I mean the bible doesn’t really say you can’t get loans, it is pretty vocal about it not being a wise thing to do. For me, it’s really more the thought of using somebody else’s money. Personally, it just bothers me, I would just rather use my own.

    While I don’t support the use of credit cards, I am certainly not going to come down hard on anybody that does, AS LONG as they manage it and pay it off. Not a choice I would make, but to each his own.

    Thanks for the comments, and the info on UK credit cards. Good info!

  5. Justin Says:

    @glblguy: I am curious, do you have a mortgage, or are you saving up to pay cash for a house?

    The one time I had to dispute a debit card transaction I had to print sign and mail a declaration. That was enough for me. Fortunately it was only an incorrect double charge, and not card number theft.

    I’m failing to see why I should be held responsible and my money held hostage should my card number be compromised and the bank allow money be syphoned off. I would much rather have the bank on my side, as with a credit card theft situation, than against me, in a debit card situation. Policies change all the time, I expect they will be changing even more soon as the housing market troubles expand and banks need to figure out where to get more money.

  6. glblguy Says:

    Regrettably, we have a mortgage. Once it’s paid off though, we’ll pay cash if we do decide to get another home. That’s a LONG way off though. I am focusing on getting my credit card debt payed off first, then I will tackle the mortgage.

    As for the bank on your side, I think they are. The problem is with the “bad apples” that report fraud when there isn’t. The bank credits them back, they pull the money out and the bank is out $x on a transaction that was claimed fraud that wasn’t.

    I agree on policy changes and potential coming changes. If they change, than I’ll change my behavior. Just have to roll with the punches. I’m cool using cash, I just find using a debit card is easier to track.

  7. Jessy Says:

    Great article! I completely agree with you about not using credit cards. My husband and I are in the process of paying off our debt (Dave Ramsey style) and it is such a long road. Looking back I can’t even remember most of what the credit cards were spent on…and the rewards certainly weren’t worth what we’re paying on interest! One comment on debit cards and pins, I’ve noticed that many places, like fast food restaurants, aren’t requiring pin numbers anymore. However I don’t know if that is a common trend or just incompetent employees. Anyway, great site keep it up!

  8. glblguy Says:

    Thanks Jessy, and really glad you like the site.

    Trust me, I know exactly what you are saying. I saw a great quote on another blog the other day, something along the lines of she had a lot more debt than stuff, so she wasn’t sure how in the heck she spent so much :-) I know exactly what she means.

    Well, they run it as a credit transaction, and I think Visa doesn’t require signatures on purchases below $25 (the exact dollar amount might be wrong). Regardless of how they run it, it is still coming out of your bank account. Are they making you sign?

  9. Justin Says:

    It sounds to me that the people railing against credit cards are the ones that weren’t able to manage them in the first place. No offence intended.

    While credit cards may not work for you and your situation, that doesn’t mean they don’t have a use or a place in many people’s finances. They offer protections written into law (US law), and provide me with about $1000 in rewards annually.

  10. glblguy Says:

    Hi Justin. Well to some extent I think you’re right. Although I am not sure we’re against credit cards because we couldn’t manage them but rather because we experienced the big mess you can run when something goes wrong. Maybe this is the same in many respects. But I would agree your right. Having a pit bull may seem like a great thing, right up to the point you get bit ;-)

    Justin, if they work for you that’s great, but you’ll never hear me advise that anyone get one. This is a personal finance site, and just goes to prove that a lot of financial decisions are indeed personal.

    Hope you continue to visit and we can respect each others difference of opinions. To each his own. I really believe that.

  11. justin Says:

    I feel I have been respectful while voicing a differing opinion and have added your site to my rss aggregator. I expect to comment again.

    Thanks

  12. glblguy Says:

    Justin, I completely agree. Thanks for the RSS add and look forward to your input and perspective.

  13. RobY Says:

    The decision to use a debit card or credit card is a very personal choice. It very much depends on YOU and YOUR situation.

    For a person who is in complete disciplined control of their finances then I would say you can find credit cards that benefit you more than debit cards. Credit card companies make a lot of money on the people who are not financially disciplined or responsible. This means they are able/willing to offer better incentives (rewards, float, protection, etc) to get your business. It is a numbers game for them so you shouldn’t feel at all guilty if you are taking a “free ride”. This is built into the business model and rules they created for this game.

    Larry, you are right however about debit cards feel more like real cash. So how can you do this with a credit card? Well, what if each and every night you transferred the exact amount of money you spent on the credit card into your high yield INGDirect emergency fund account. That way you are very in tune with its affect on your bottom line but at the same time you get the protection of the credit card and the financial benefit of float interest. However, the key concept here is financial discipline.

    However, my impression is that MOST people (even if they have the knowledge) do not have the financial disciple to keep themselves out of trouble. For those people the debit card is probably the better choice. Going from irresponsible use of credit cards to the built-in discipline of debit cards is a very valid step in a personÂ’s journey to financial freedom. It can be a very powerful technique to break poor credit card habits. Then, over time with new habits, a person may have matured to the point that they can use credit in a beneficial way.

    The proper use of credit should not be dismissed in your journey to financial success. In fact, using credit after you fully understand it and are disciplined enough to control it is a SMART move. However, using credit when you are not ready or able to handle it can be a disaster.

    The comments on this post are great. The differences in opinion are simply a matter of perspective based on where the author is in this journey.

    So, Are Debit Cards Are Better Than Credit Cards?

    The correct answer depends on YOU.

  14. glblguy Says:

    @RobY – Wow Rob, you need a blog ;-) I agree it’s a personal choice, but as I told Justin you won’t get me to advise using credit cards to anybody, regardless of their situation.

    You can certainly make a credit card “feel” like cash, but regardless your paying with whatever you are buying with a loan.

    You are right though, it most people’s hands, credit cards are very dangerous…trust me, “My name is glblguy, and I do stupid things with credit cards…” :-)

    As for credit being a SMART move, not sure I agree. I think anytime you put yourself in the situation of owing somebody else something based on your expectation of being able to pay it off is a slippery slope.

    Credit cards aren’t bad, they just allow people to make really stupid mistakes. Now, I do think most credit card companies are bad, but that’s another story…

  15. MITBeta Says:

    Interesting discussion — I have a number of comments:

    @glblguy: “As for the bank on your side, I think they are. The problem is with the “bad apples” that report fraud when there isnÂ’t. The bank credits them back, they pull the money out and the bank is out $x on a transaction that was claimed fraud that wasnÂ’t.”

    Make no mistake, the bank is NEVER out money on credit or debit transactions. I worked for an online store at one point and whenever a chargeback occurred, the money came right out of the merchant’s account and the onus was on us to prove that the transaction was legitimate. This is difficult to do in the online world since we have no signature to use as proof. If we do have some kind of proof, the chargeback gets reversed and the customer ends up paying, but the bank NEVER has to pay.

    I currently am a debit card user, mainly because as RobY pointed out, that is the part of the journey that I am on, having paid off my credit card debts and learned to spend (less than…) what I have, not what I will have.

    However, after much thought, introspection, and planning, I have recently come around to the idea of using credit cards again as a tool to accomplish the following:

    1. Protect myself against fraud and mistakes. I don’t want someone to be able to clean out my checking account. Luckily I have a separate checking account specifically for “discretionary” spending. The BillPay on my primary account pays all of my periodic fixed expenses. So what’s left (after I pay myself, of course) goes into the discretionary checking account. There is never that much money there, so there’s no a lot to get. But after some recent fraudulent uses of my debit cards, I am more concerned about the implications of having a debit card. Yes, the bank issued a “provisional” credit to my account, but only after I mailed in a detailed, notarized affidavit explaining the situation. That’s a lot of work and time to get MY MONEY back. Luckily the charges weren’t that high, and I have enough of a reserve to be able to handle little bumps, but things could have been worse. (And yes, I am changing banks.)

    2. Rewards: I have a 7 month old daughter and there is no time to think about paying for college like the present. I can’t yet afford to put much, if any, money away for her education since my retirement takes precedence, but if I could get free money simply for paying my bills will a credit card that I could put towards her 529 plan, I would be foolish not to.

    3. Float: I have no problem using the credit card company for a short term loan. Put all of my monthly payments on the credit card and let the money sit in my high interest money market account for 1-30 extra days. The credit card companies have earned enough interest off of me over the years, I think a little payback is in order.

    The cardinal rule of living within your means is: Don’t buy things for which you don’t have the money. If I use a credit card to accomplish to above 3 items, I will still have the money in my bank account. I won’t be spending money I don’t have, it will just be in a more roundabout way.

  16. glblguy Says:

    MITBeta, thanks for the correction, but technically we are both wrong and right. Transactions less than $50 the banks generally just write off. It’s not worth the trouble to follow through on them. For more than $50, you’re correct the person that processed the transaction is responsible. I forgot about this little rule when I wrote the article. I work for a bank, should have remembered.

    Good points, and a nice example of how credit cards can be used as tools.

  17. Siena Says:

    I am anti-credit card as well. I think you made a good point on debit cards. I receive rewards on my card (not a lot but some) and each time I use my debit card, a portion goes to local schools. I know people who have received a lot of better rewards including a free airline ticket and cash deposits into their bank account for using their debit cards.

    It seems everytime I’m at a store, people are paying with their bank card vs. a credit card. I think the more people turn to debit cards, the more protections will be enacted. I have heard that if you use the credit option of the debit card, you have the protection as if it was a regular credit card. This I’m not sure about but I think I’ve heard that somewhere just recently.

  18. glblguy Says:

    Great points Siena. To be honest, I am not sure on the same protections or not. Seems to an area that is a little fuzzy, maybe somebody else can shed some light on this.

  19. MITBeta Says:

    Each bank is different in what protections it offers to its debit card users. There is no general law as is the case with credit cards. So individuals need to ask their banks or read all of the fine print that comes with a new account to determine what their banks policies are in this regard. Personally, I have yet to see any bank offer as good of protection as the credit card companies do, although some come close. Also, when you dispute a credit card change, you’re not out any money, whereas if someone gets your debit card number and goes on a spending spree, you might eventually get that money back, but in the mean time, good luck paying the mortgage.

  20. Justin Says:

    @MITBeta: Exactly! If your credit card is compromised you are NEVER out any money. If your debit card is compromised you can be bouncing bill payments all over the place once your account and overdraft protection (savings acct or credit acct) get wiped clean. Then you have a mess to clean up with the utilities, the mortgage company, etc.

  21. Nina Moric Says:

    Hi there…Man i just love your blog, keep the cool posts about it Cards Are Better Than Credit Cards | Gather Little By Little comin..holy Saturday .

  22. glblguy Says:

    Hi Nina, thank you and glad you like my blog!

  23. Chris Says:

    I’m sorry, but I know from experience that banks do not offer the same protection. I’ve had my credit card info and debit card info stolen before. The credit card companies reported it and refunded my money.
    The bank on the other hand said it was out of their hands and can’t keep up with every purchase.
    Never used a debit card again

  24. glblguy Says:

    Hi Chris, your statement is a little too general. The level of protection is dependent on the bank and the banks policies. Sounds like your bank didn’t have a good set of these.

    I recently had my debit card stolen and my bank refunded me all of my money and worked with the merchants.

    Please don’t let a bad experience with one bank tarnish your whole view of debit cards.

    Thanks for stopping by and for taking the time to comment.

  25. Justin Says:

    Chris’s experience is one of the major reasons I prefer to use a CC, the protections are mandated and not just policies than can be changed with 6 point type at the back of a new privacy statement.

  26. MITBeta Says:

    Glblguy: You stated in your initial post that the protections on debit cards are equal to the protections on credit cards. This is simply not true, and you’ve had a number of people prove you wrong in the comments, yet you cling to your assertion that debit cards are better than credit cards.

    By the way, since your initial post I have made approximately $500 in interest on a 1yr 0% APR credit card float, plus another $250 in rewards cash. I still have 6 months of 0% APR on my rewards card, and I fully intend that by the end of that period I’ll have $30,000 sitting in my high interest savings account earning $200/month in interest on the bank’s dime. Try doing that with a debit card.

  27. glblguy Says:

    @MITBeta – The reason I “cling” is not due to the protections. In my instance with my bank, I would argue the protections are equal, just not mandated. Sure,maybe the bank won’t honor them, but that is a risk I am willing to take. In my recent experience having my card stolen and card used, the bank refunded all of money within 48 hours.

    I cling because I don’t trust credit card companies and I don’t like borrowing money, if even for 30 days. If you are comfortable using credit cards, that is a personal choice you’ve made that I respect. I don’t feel that is the right choice for me, and hence why I voice my opinions about them on this blog. For me debit cards are better than credit cards…but better is a very subjective word. What is better for me, may not be better for you right?

    I think that’s great you’ve made that much money, but if you play with fire, you’re bound to get burnt. I think this all boils down to personal feelings and comfort. I’ve been burned by credit card companies, and have chosen to not let that happen again.

  28. MITBeta Says:

    Your opinion is fine, but you state:

    “Reality: Credit cards are protected by the The Fair Credit Billing Act and debit cards are not. Policies instituted by banks do give you the same levels of protection.”

    This is simply not true.

  29. glblguy Says:

    MITBeta – Ok, I agree. I made some changes to the article and added a note at the end. See what you think.

  30. MITBeta Says:

    ;)

  31. MITBeta Says:

    More fuel on the fire:

    http://www.fivecentnickel.com/2008/01/16/yet-another-reason-credit-cards-are-better-than-debit-cards/

  32. Make Friends, Earn Money Says:

    I personally like that debit cards are great for people who are habitual spenders because you can only spend what’s in your bank account rather than racking up huge credit debt. I do have concerns however about their security because if someone intercepts the card number they can withdraw staright from your account. Whilst you’ll get the money back if you’re a vicitm of fraud, it’s very time consuming

  33. Justin Says:

    Make Friends dude, no, you can’t only spend what’s in your bank account. The bank will allow you to spend more than what is in your account and then will charge you fees for the privilege, for EVERY CHARGE over the balance. It’s easy to rack up hundreds of dollars in fees for $1, $2, $5 purchases made on your debit card this way.

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  35. Felica Ork Says:

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  36. Abigail Watson Says:

    I myself agree that debit cards are better than credit cards, and that it is true in the book of Proverbs in the New King James Version of the Bible: Wealth gained by dishonesty will be diminished, but he who gathers by labor will increase.

  37. greg Says:

    I doubt very seriously that there is any debit card out there that is giving the amount of reward points I get with my Chase Sapphire card. Also, I do pay my bill every month and I do not really have any trouble remembering to do that.

  38. all top tens of the world Says:

    thanx for this wonderful article….

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