The conclusion begins this article. If you’re shopping online, it’s better to use your credit card, not your debit card, in almost all cases.
For someone just beginning to focus on improving one’s finances, this seems to be the wrong conclusion. After all, in theory, with a debit card you can spend only what’s in your bank account (or deposited into the prepaid debit card account), while with a credit card it’s much easier to spend money you don’t have. If this hypothetical individual followed some money guru’s advice to cut up all credit cards to remove the temptation to spend, the debit card may be the only choice for buying products online.
Credit cards have a number of advantages over debit cards. Some benefits vary across issuers, so it’s good to check your account agreements for some of the details. Overall, the credit card concept is better for spending than the debit card process.
Credit cards create an extra layer between your real money and other people. A debit card is linked directly to your money. This creates additional, unnecessary risk. It’s no different than paying with your cash — as soon as you make a purchase, your money is gone. If there is a problem with that purchase, you have to work with the seller to resolve the dispute. Once you give your money away, you cede almost all of your negotiation power. Entities like the Better Business Bureau exist to give some power back to you, but it’s not much.
When you use a credit card, you have a company that is, from at least this one perspective, on your side. I experienced this first-hand last month when an unauthorized charge appeared on my credit card activity. I attacked this problem on both sides. I called the phone number listed with the charge on the list of activity and determined with 100% certainty that the charge was not a result of anything I did and began the process of getting the charge refunded by the vendor.
Immediately following that call, I called my credit card to make them aware of the fraudulent charge. Even though the vendor said they would process a refund, that could take some time. The credit card issuer reversed the charge pending the refund, so even if the statement period closed, I would not be responsible for that charge.
With a debit card, the situation would be very different. The amount of the charge would already have been deducted from my bank account — my actual, real money. Most debit cards offer some sort of protection against this situation, but if my account balance was low, it could have triggered a series of overdraft fees, which could be a pain to reverse. If an unauthorized charge prevented my rent check from clearing, I could get in trouble with my landlord, all before having the chance to dispute the fraud.
For habitual spenders, credit cards are still better than debit cards. One of the frequent objections to using credit cards as a primary form of payment is that the advantages are, for most people, outweighed by disadvantages. It is true that many consumers can’t handle credit cards without spending more than they can afford. The result is high interest fees, ruined credit ratings, and a cycle of debt that can destroy a life.
But a debit card with so-called overdraft protection is much worse. The overspending issues with plastic or electronic forms of payment are roughly the same, whether the tool is a credit card or a debit card. Multiple overdraft fees can cost more than credit card interest and late payments, and your precious bank account sees the effects immediately. With a credit card, you can close your account and work out a payment plan, but with a debit card, options like this don’t exist.
Use a credit card wisely, and collect the rewards. For those with control over their spending, credit cards can actually be profitable. Credit cards are more likely than debit cards to offer cash back or other rewards you might like to acquire. Credit card issuers can afford to pay some customers for using plastic because of the incredibly profitable nature of the mix of late fees, interest fees, and interchange (swipe) fees.
Over the last few years, debit card issuers have experimented with rewards, but for the most part, these experiments have failed.
Credit cards and debit cards may eventually be replaced by virtual currency, like Bitcoin. I experimented with Bitcoin back when the technology was new. It required installing an application on my computer, and the more processing power you devoted to the currency, the more you could have. Today, I believe there are some limitations in place so that how much currency you could create isn’t influenced by how many computers you have working for you. These days, the value of one Bitcoin has increased so much relative to the US dollar that people are looking at the currency as a speculative investment. Like any other investment, I sure regret not sticking with Bitcoin.
Because I did have an early Bitcoin wallet and did create some currency, I’m wondering if I can recover what I had. That’s a project for another day.
Once some of the kinks are worked out and the value stabilizes, this virtual currency could be the best way to handle all transactions, online and offline. But until then, online shoppers should stick to credit cards.
Do you use credit cards or debit cards for shopping online?
Published or updated November 25, 2013.