Last year, Americans spent more money with debit cards than credit cards for the first time ever recorded by Pulse’s annual study.
“The pandemic has driven debit to greater heights,” says Steve Sievert, a spokesman for Pulse. According to Sievert, spending habits during the COVID-19 pandemic prove debit cards are “the preferred method of payment for tens of millions of consumers, but even more so during times of financial uncertainty.”
Despite last year’s record-breaking trend, you still shouldn’t use a debit card unless you absolutely have to. As long as you can pay your credit card bills in full every month instead of carrying a balance and racking up interest, you should pay for everything you possibly can with a credit card.
“If used responsibly, I see no reason why you shouldn't use a credit card for a majority — if not all — of your spending,” says Hanna Horvath, a certified financial planner at Policygenius. “The only reason I would ever use my debit card is to take out cash for businesses that don't take cards.”
Here are the four main reasons why credit cards are usually a better payment option, plus a few scenarios where debit cards make sense.
1. Debit cards don’t (usually) pay you back
“Unlike debit cards, credit cards often offer rewards in the form of cash back or points,” says Horvath. Banks make more money from your credit card swipes than they do from debit cards, so they offer lots of credit card incentives and bonuses. For some credit cards, it’s anywhere from 1% to 6% cash back on every purchase, or at least on certain spending categories. For others, it’s membership points that can be used toward travel expenses like flights and hotels or converted into cash back. Plus, many credit cards offer enormous bonus offers just for signing up — anywhere from $100 to $1,000, usually tied to a minimum spending quota across your first three to six months as a cardholder.
But the vast majority of debit cards don’t offer any purchasing incentives at all. If you spent $10,000 on a credit card last year with 1.5% cash back, you earned $150 back. If you spent $10,000 on a debit card, you earned nothing back. There are a few exceptions, like Discover Bank’s online checking account, which offers 1% cash back on up to $3,000 in spending per month (a maximum of $360 cash back per year).
2. Debit cards don’t offer the best fraud protection
If someone steals your credit card or makes fraudulent purchases, the vast majority of credit card issuers won’t charge you a dime. Even if they do, the most you’ll ever be on the hook for is $50 thanks to the Fair Credit Billing Act. Debit cards, on the other hand, are protected by a different law with weaker protections, the Electronic Funds Transfer Act. If you don’t report fraudulent activity on a debit card within two business days, your out-of-pocket liability goes up to $500. If you don’t report it within 60 days, your liability is unlimited, meaning you could be on the hook for every stolen dollar.
Plus, fraudulent charges on a debit card come straight out of your bank account, so you immediately lose the funds until your bank can reinstate them. Fraudulent charges on a credit card only show up on your statement, giving you plenty of time to report and correct them before your next bill is due.
3. Many credit cards offer purchase protection & extended warranties
When you buy something with a debit card, you’re 100% beholden to the merchant’s return policy in the event your item is damaged or stolen. Thankfully, many credit cards now offer purchase protection for a period of time, usually 90 to 120 days, and under certain conditions. If you meet the right conditions and submit enough documentation before your credit card’s protection period expires, you can be reimbursed up to $500 or $1,000 per claim.
More premium credit cards, like Visa Signature and Visa Infinite cards, also offer extended warranty protection for up to a year after the manufacturer’s warranty, and for up to $10,000 per claim. Make sure to check your credit card’s benefits to see what kind of purchase protection or extended warranty benefits you qualify for.
4. Paying with a credit card helps boost your credit score
“Using your credit card and paying it off each month can raise your credit score,” says Horvath, “which can help you score better loan term agreements and insurance discounts.” Every month, your credit card issuer sends a report to credit bureaus indicating your account is in good standing (assuming you haven’t been missing payments), as well as how much you owe compared to your total credit limit (also known as your credit utilization ratio). Using your debit card doesn’t do anything for your credit score.
The one caveat here is that using a credit card means you absolutely, without exception, must make at least the minimum payment every month, since missing credit payments will show up on your credit report and stay there for seven years, all while lowering your credit score. To avoid even the possibility of missing a credit card payment, consider signing up for autopay to automatically pay your balance in full every month — just note that you may still need to manually pay your first bill after turning on autopay (if your previous statement period has already closed).
When should you use a debit card?
When you have to. There are a few expenses you can’t put on a credit card. Mortgage, rent, car, and loan payments usually have to come directly out of your bank account, though there are exceptions. Some car dealers will allow you to make payments with a credit card, and SoFi’s credit card actually rewards you 2% cash back for paying down a loan. Since housing, loan, and car payments are usually a major chunk of your income, credit card rewards can add up quickly; just make sure they aren’t canceled out by an extra fee for paying with a credit card (see below).
When there’s a credit card surcharge. Some merchants and lenders charge an extra fee to individual consumers, a “credit card processing fee,” to offset the fact that a fraction of every credit card payment goes directly to the card issuer instead of them. Unless the surcharge is significantly lower than the rewards you’ll reap from using a credit card, it makes sense to use a debit card in this scenario, though you’ll still miss out on the benefits described above.
When you want to support a small business. Since somewhere between 1% to 3% of every credit card transaction goes to the credit card issuer instead of the merchant, it also makes sense to use a debit card when you’re supporting a small business that’s important to you. The merchant will still be charged a fee by the debit network, but the percentage is much smaller, by an order of magnitude. Paying with a debit card at your favorite mom-and-pop coffee shop ensures they get more of your cash.
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