I have two checking accounts. One is with Wachovia, which has been my main checking account (through bank mergers and acquisitions) for the last 15 years or so. The other is with ING Direct, which is a more recent development.
Both checking accounts have provided me with debit cards which can be used to access the accounts at ATMs or for purchases. Once I started getting my finances in order, I stopped using debit cards for purchases and started using credit cards. Some of the reasons for doing so are discussed in a recent MarketWatch article. Here are MarketWatch’s four reasons, plus one of my own.
Double funds tie-up. Gas stations pre-authorize your account before pumping and the bank places a hold on those funds. This hold does not disappear when the “true” charge is authorized. If you plan your checking account close to the hilt, which I used to do, this can result in unintended overdrafts. Now I have enough available funds to keep a buffer in my checking account, but I shouldn’t have to. Sometimes the pre-authorization hold is only $1, but some stations may re-authorize as much as $50. If you use a credit card, there is no “hold” and only the true charge affects your available balance.
Can’t dispute debits. MarketWatch notes that some banks have started to offer consumer protections for the debit cards, but they still don’t come close to what is offered for credit cards. Here’s an example from the article:
A friend of mine recently bought three bottles of her favorite Scotch in a Mexican airport duty-free shop. The shop didn’t deliver the goods to the plane before take-off, and she went home empty-handed. She was able to successfully dispute the charges. Good thing she used a credit card.
If she used a debit card, she would not have her money back in her account until the investigation was complete. That’s an unacceptable situation for me.
Can’t rent a car. This is probably the most basic argument against those who try to convince others that life would be better entirely without credit cards. You can’t rent a car with cash. You should be able to, and maybe there is a rental company somewhere that will allow debit cards for the initial deposit required for reserving a vehicle, but it’s incredibly uncommon.
Theft protection. The article points out that a the owner of a stolen credit card is liable only for $50, but the owner of a stolen debit card can be liable for much more — and if the card is used by a thief, the money will still be deducted from the true owner’s bank account pending the investigation. Take a look at this:
The bank has up to 10 business days — and up to 45 if an investigation is required — to restore your balance. And if you take more than 48 hours to report a lost card, your liability limit is $500, not $50. Worse yet, if you fail to report a loss within 60 days of a bank statement showing the fraudulent transaction, your loss is unlimited.
It’s definitely helpful to be on top of your finances and report stolen cards immediately, but these days, card numbers can be stolen without the owner’s knowledge and used in a number of places where no signature or PIN is necessary.
Here’s a reason of my own, not mentioned in the articles.
Rewards options. Right now, the ING Direct Debit Card is offering 1% cash back, but cash back rewards with debit cards are few and far between. You can do much better starting with these cash back credit cards. Of course, if you pay any interest or late fees at all, this reason quickly becomes invalid as the fees outweigh the rewards.
If you find that whether using debit cards or credit cards, you spend more than you should, the best option is to find a way to always have cash on hand and save the credit card for only when necessary (like reserving a rental car as mentioned above).
Do you prefer debit cards or credit cards? The only situation in which I can presume that use of a debit card is better than a credit card is if you will be concerned about your credit score in the short-term and you spend close to your credit limit on a monthly basis. Frequent debit card user may be able to explain other benefits that credit cards do not offer, so feel free to share.
Updated February 6, 2012 and originally published July 2, 2007.