Why Credit Cards Beat Debit Cards

Smart Money has a series listing ten things debit card issuers won't tell you. Of the ten, two of their points really stood out to me. They are:

4. "Credit cards can be a better deal than debit cards."

For years, consumers have been told that debit cards have more benefits than credit cards. Debit card users don't run the risk of going into debt and damaging their credit score like they do with credit cards. But some experts are questioning that logic. For consumers who diligently pay off their credit-card balance each month there's little reason to use debit cards. They won't incur interest rate charges, or late fees, and they can avoid annual fees by using credit cards that don't charge them.

The reason boils down to rewards. Credit-card rewards are becoming more generous while debit-card rewards are fading.

As for rewards, it's hard to beat credit cards. There are great rewards for using credit cards (see my list of the best cash back credit cards) as well as just getting a card (see my list of the best credit card bonuses). These can add up to big money over the course of a year.

The only decent debit card reward I've seen is the PerkStreet 2% debit card (which is a pretty good deal.) But I can earn more than that fairly easily (without the deposit requirement too) with my current credit card strategy. I think most FMF readers could as well.

My personal debit card doesn't pay rewards, but it allows me to earn 3% on my money saved at my credit union. We have to make 10 transactions per month to get this benefit, so we use 10 small charges, saving the big ones for credit card purchases.

7. "Your bank account is vulnerable to thieves."

Debit card thefts -- be it the actual card itself or the account number -- can destroy consumers' finances. In the worst-case scenario, a debit-card theft could wipe out a cardholder's bank account, and if a checking account is linked to a savings account, victims could lose that money, too, says Jay Foley, identity theft expert and founder of the ID Theft Info Source, a consulting firm.

Consumers are advised to move quickly in reporting the theft to the card issuer. When a physical card goes missing or is stolen, consumers have just two business days after learning about the loss to notify the card issuer in order to limit their losses to just $50. But wait longer than that and the chances of recovering whatever money was fraudulently taken decline.

Ah yes, security. You have more of it with credit cards than debit cards, that's for sure. Especially if your checking and savings accounts are hooked together and you have a good amount of your emergency fund saved at the same bank (which many people likely do.) It's a BIG reason to favor credit cards over debit cards.

I'm sure someone will comment that you'll spend more with a credit card than you will with a debit card. The studies on this are mixed, but I think that they are likely true in general -- that the average American will spend more with a credit card than if he has a debit card or cash. That said, the average American is in debt, has little savings, and can't control his spending, so is it any wonder that he spends more when he has a credit card?

Personally, I'm not shooting for average (and I'm guessing most FMF readers aren't either). That's why I don't have any debt, have a good amount in savings, and can control my spending, whether that spending is in cash, credit, debit, or anything else. So for me, it's credit cards all the way. If used responsibly (which is the only way anyone should be using them), they can be a great asset and source of a decent amount of extra income each year. What's not to love? ;-)

Comments

[Nick]

I back into good finances, so credit cards are fine with me, even if I spend a little more than I normally would with cash (I don't really see debit as much different than credit).

I use auto-invest to shovel money into retirement and other savings and investment accounts to "make sure" I have enough going to investments to retire well and/or young. Of the rest, I generally save a little more because I think it's good to be a "saver" by nature, not just by auto-invest, and then spend no more than the rest using a basic budget.

I use credit cards over debt cards for multiple reasons, especially the security and extended warranties, but also for the rewards.

Good stuff. I completely agree with both of your points.

[Jonathan]

I've never used a debit card in my life, and have never understood why anyone would. More recently I've realized that for some people, generally due to poor financial choices, credit cards are not a good or viable option. But for a responsible user of credit, there's no reason to use a debit card.

[Dollar D @ The Dollar Disciple]

Credit cards for the win. We have all of our bills setup to use the same cashback credit card. Every January, we get a nice bonus, just for paying our bills.

If you are responsible with your money and pay off your balance every month, then a rewards credit card is the way to go!

[Matt]

Debit card is only used at ATM to pull money out or make deposits. Other than that it is not even in my wallet becaue you loose the card someone can charge and empty your account.

My son who is in college uses his debit card when he needs to buy books. He also uses it rarely.

I only use credit cards that have rewards because I pay off all the time.

[Jon]

I never use a debit card. Debit card fraud means that YOUR money was compromised, so the bank takes its sweet time figuring things out. With credit cards, it is THEIR money that was compromised...much more incentive to get things ironed out FAST!

[Tyler S.]

Growing up, I never really learned much about credit cards and how they worked. The only time I really saw anything about them was on debt commercials where people got in debt way over their heads.

Naturally, I didn't want to get into debt like that, so I avoided credit cards. Just in the past few years, I have been educated on credit cards by some knowledgeable friends, and have put them to good use, since I pay off my entire balance each month.

I'm happy to say I never use my debit card anymore.

[John]

I use my credit card as if it was my debit card. I use the Chase Freedom card exclusively. Here's my strategy. I don't spend money I don't have. If I don't have $6 on my checking account to pay cash for a lunch then I sure as hell don't pay for the lunch with credit card. Now let's say I do have that money. I gladly pay for lunch using $6. Just as soon as I have the receipt on my hand, I quickly log into my checking account (thanks to smartphone) and transfer $6 from checking to credit card. I never have a balance on my credit card. I use it as if it is my debit card. I had this card for about 5 months now. I'm averaging about $100 in reward every month. Not bad. Who's going to give you $100 everything for using your own money. In essence, I'm being paid to use my own money.

I'm not braggin' here but hope that this inspires you someone.