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Credit Card or Debit Card: The Great Debate. It’s Not Even Close.

Have trouble getting approved for a credit card? Do you have bad credit? Maybe a debit card is an answer.

But, not to spoil the surprise, it’s not.

So, I’m going to help you to understand why a debit card is a much less form of payment, provides less protection from scams, and does nothing to build or maintain a credit score.

“But Steve, why do personal finance experts keep saying a debit card is smart, and I should use it?”

I have no damn idea why supposed personal finance gurus keep doing that. There is the argument a debit card stops you from overspending. But people can own sharp kitchen knives and not stab people. If the issue is overspending, a debit card will cause more damage and fees and do nothing to boost a credit score.

So let’s deep dive into this topic and look at the facts using logic instead of assumptions.

Banks and financial institutions are rushing to issue their customers debit cards. In addition, many of these companies routinely issue “enhanced” ATM cards that can also be used as debit cards to make purchases. This article will tell you everything you need to know about debit cards and how they differ from credit cards.

“Why would my bank push me to use a debit card?”

Because they earn a fee every time, you use the debit card. It’s about making money.

A credit card allows you to buy goods and services and pay later — up to a certain amount (your “credit limit”). The merchant or service provider from whom you made the purchase collects what you owe from the card issuer — the company that issued you the card. The card issuer then bills you every month. The minimum monthly payment due is based on a percentage of your total balance. You are charged interest on the unpaid balance you owe at the end of each period.

Credit cards are regulated by Regulation Z.

A debit card is not a credit card, even though it can use the same merchant networks as those of Visa and MasterCard. Instead, a debit card is like an Electronic Funds Transfer (EFT) card or electronic check.

Debit cards are regulated by Regulation E.

There are two types of debit cards — online and offline.

Online debit cards are usually enhanced ATM cards. When you purchase something using an online debit card, you immediately transfer money electronically from your bank account to the merchant’s bank account.

You must punch in your personal identification number (“PIN”) to access your account for added security. Offline debit cards may have the Visa or MasterCard logo and can be used anywhere that accepts Visa or MasterCard credit cards.

When you pay with an offline debit card, you sign for your purchase without providing any additional identification, just like a credit card.

The payment for the purchase is deducted from your checking account within one to three business days after the transaction.

This “float” period is comparable to the time it takes for a regular check to clear the bank. Some debit cards handle both offline and online debits, and you would choose the function you want when you use the card.

Most people use a credit or debit card for convenience, but they don’t understand the downsides to debit card use.

Sure, with both cards, you don’t need to carry much cash while away from home.

If an emergency arises, such as a broken-down car, and the cost of the repair outweighs the cash in your pocket, a credit or debit card comes in especially handy.

Credit and debit cards carrying the Visa or MasterCard logos are accepted worldwide, and they save you from the identification hassles connected with writing a check. However, debit cards are not accepted everywhere.

For example, you might not be able to use a debit card to rent a car or reserve a hotel room.

The Major Differences Between Debit and Credit Cards

A debit card is most like an electronic check. If you are not comfortable handing someone a check with direct access to your checking account, don’t hand them your debit card.

There are several significant differences between credit and debit cards, outlined below.

Card Incentives

Certain credit cards will offer special services to make them more appealing, such as replacing lost or stolen merchandise, frequent flier programs, a warranty extension on a product, automatic air travel insurance, or collision waiver insurance for rental cars. Read the fine print on these benefits — they might not always be as wonderful as they sound. On the other hand, debit cards don’t usually offer these kinds of services to the cardholder.

Fees/Costs

With debit cards, since the money comes directly from your checking account and you never have an outstanding balance, you avoid interest charges, late fees, and over-limit fees connected to credit cards.

However, you can overdraft your checking account and wind up with a cascade of over-limit fees and sky-high charges from your bank. For example, a person recently purchased a drink for $1.25 using their debit card, resulting in an additional $35 over-limit fee from their bank. Then ten more transactions hit the account, and ten more $35 fees were charged. A bank can let you exceed your checking account balance unless you’ve instructed them to decline transactions.

If you take cash from your bank’s ATM with your debit card, you don’t pay interest or a transaction fee as you normally would when taking cash advances on a credit card.

If you use a machine not associated with the bank that issued your ATM card, however, you may be hit with two separate fees — one from the bank you are using and another from your bank for not using a machine on its network. In addition, you also may be charged a fee if you exceed your bank’s quota of free debit transactions.

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Spending Limit

A significant disadvantage of credit cards is that undisciplined cardholders can spend much more money than they can afford. At the same time, a debit card avoids this problem because the funds are taken directly from your checking account. However, there is nothing that prevents the credit card user from sending payments for charges to the creditor on a daily or weekly basis.

If you spend more than you can afford with your debit card, checks you have written recently may bounce when they reach your bank. You will then have bounced check fees to pay, which can be very high.

To avoid this, know how much money you have available in your account and budget carefully by tracking debit purchases in your check register. Be sure to pray that a transaction doesn’t hit your checking account in the wrong amount. I’ve seen people charged $2,000 for a $20.00 item.

Also, be aware that a debit card may not give you a debit limit equal to the balance of the bank account to which it is linked. Check with your bank to find out how your limit is calculated.

Credit Rating

Unlike credit cards, debit cards cannot help you build good credit because the accounts are generally not reported to credit reporting agencies.

If you are looking to rebuild your credit and can’t get a credit card, you should consider an unsecured credit card, and if you can’t get that, get a secured card, where you place a deposit with the bank equal to your credit limit.

Secured cards are an excellent way to build strong credit history; as a bonus, the deposit you make may earn interest.

Billing Errors

Federal laws treat billing errors on credit and debit card accounts differently.

Suppose you find an error on your credit card bill. In that case, you must notify the card issuer “no later than 60 days after the creditor transmitted the first periodic statement that reflects the alleged billing error.”

You are not required to pay any disputed charge. Regulation Z says, “The consumer need not pay (and the creditor may not try to collect) any portion of any required payment that the consumer believes is related to the disputed amount (including related finance or other charges).”

Contact customer service or look at your cardholder agreement for details on how your credit card handles charge disputes.

Within 30 days, under federal law, a credit card issuer must either acknowledge receipt of your letter or correct the bill. If the card issuer does not correct the error within those 30 days, it must either do so within two billing cycles or explain why it hasn’t. Until the dispute is resolved, you can withhold payment of the disputed amount, and the card issuer cannot report you as delinquent to the credit reporting agencies. But the card issuer can apply that amount to your credit limit, charge you interest on the disputed amount (and later subtract it if correct).

For debit cards, you also must notify the card issuer within 60 days of the date of the statement that shows the billing error (or the receipt). You should call the card issuer to notify it about the error, then immediately write a letter confirming the phone call. Under federal law, the debit card issuer has ten days to notify you they’ve received your dispute request. “The institution shall report the results to the consumer within three business days after completing its investigation. The institution shall correct the error within one business day after determining that an error occurred..” However, your bank can extend the investigation period up to 45 more days but can extend provisional credit to you during the extended investigation. However, they may withhold a maximum of $50 from the account credited.

This doesn’t even include issues related to unauthorized use or fraudulent transactions. This is just for dealing with errors when incorrect amounts are debited from your account.

Keep this in mind. If there are charges that are not authorized or incorrect. The credit card company acts as a buffer, and you don’t have to pay them. With the debit card, they are hitting your checking account immediately, and you will have to deal with the consequences.

Merchant Disputes

Different policies govern merchant disputes, depending on whether you used a credit or debit card. If you are dissatisfied with a product or service that you purchased using your credit card, the Fair Credit Billing Act gives you the same legal rights against the card issuer that you would have under your state laws against the merchant.

So if your state law gives you the right to withhold payment to a merchant for defective merchandise or pay and later sue for a refund, you might also be able to withhold payment to your credit card issuer. But, state laws vary again, so you should talk to an attorney or your local consumer affairs office.

In general, your dispute rights only apply if you gave the merchant a chance to cure the problem, bought the item in your home state or within 100 miles of your current mailing address, and paid more than $50.

There are no dispute rights for debit card purchases under federal laws. However, some debit card issuers treat disputes regarding the quality of goods or services the same whether a consumer uses credit or debit cards to make his purchases. Check the terms of your debit card agreement.

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Theft Protection

Perhaps the most startling difference between debit and credit cards is the protection you get under federal law if your card is lost or stolen. Unfortunately, if your debit card has been lost or stolen and you fail to notify your card issuer within a short period of time, there is very little protection for you under federal law.

Under federal laws, your liability is $0 for any unauthorized charges after you report the card missing. Still, you can be liable for unauthorized charges before you notify the card issuer. For example, you are generally responsible for $50 of any unauthorized withdrawals if you notify the card issuer within two business days after you realize the card is missing.

You are responsible for $500 of any unauthorized withdrawals if you notify the card issuer two business days or more after realizing the card is missing, but within 60 days after the card issuer mailed the bank statement listing the unauthorized withdrawals.

Suppose you fail to notify the card issuer within 60 days after the bank statement with the unauthorized withdrawals is mailed to you. In that case, you are responsible for all unauthorized withdrawals up to the time of your notification.

You may get relief outside of federal law, thanks to consumer complaints. Visa and MasterCard, some banks, and some states have established policies beyond federal law to protect consumers. For example, Visa and MasterCard have policies that establish the same protections as exist for unauthorized credit card charges: debit card holders are not responsible for any unauthorized charges as long as they notify their issuer immediately and have a maximum liability of $50.

Some banks and states also have capped the liability for unauthorized withdrawals on an ATM or debit card at $50. You should check your financial institution and state Consumer Protection office about your liability limits.

Under federal law, after you notify the debit card issuer about your lost or stolen debit card, the issuer has up to 10 business days to investigate and credit your account if it was used fraudulently. Some debit card issuers promise faster provisional credit. Although they are not required to, as a measure of good customer service, some debit card issuers waive bounced checks and other fees that incur from checks that unintentionally bounced because a debit card was stolen.

A Few Final Suggestions

  • If you are considering obtaining a financial transaction card to build your credit history, consider a secured card or credit card and use it responsibly.
  • For maximum consumer protection, a credit or secured card is preferable to a debit card.

If you decide to get a debit card:

  • Budget diligently and know how much money you have in your account. Write all withdrawals into your check register. Reconcile all ATM receipts with bank statements as soon as possible.
  • Memorize your PIN, and don’t carry your PIN in your wallet, purse, or anywhere near your card. Never use your address, birthday, phone number, or social security number as your PIN.
  • Hold onto your receipts from your debit card transactions. A thief may get your name and debit card number from a receipt and order goods by mail or telephone.
  • Check your debit card account statements to ensure there are no mistakes. If you lose your card or it is stolen, call your card issuer immediately and follow up the call with a confirmation letter.
  • Avoid using your debit card for specific purchases. If you use a debit card to purchase airline, train, or bus tickets, the money is taken out of your checking account immediately or within three days after the reservation. If there is a change in your plans and you need to cancel or postpone your trip, it can take weeks to get a refund. In addition, some major car rental companies do not accept debit cards for reservations.
  • Think twice before linking your savings account to a checking account with debit card access. Your checking and savings account can be drained if thieves steal your card. If you get an overdraft account linked to your checking account, you can get into even more trouble if your card is improperly used. Some card issuers or banks have daily limits on debit card withdrawals, which prevent thieves from clearing out bank accounts. Check with your debit card issuer to determine your daily limit.

Regardless of your decision, a debit, credit, or secured card will offer you the purchasing convenience you have been searching for. Please refer to the following table that compares credit and debit cards. Good luck!

Credit Card vs. Debit Cards A Side-by-Side Comparison

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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