Using a debit card has advantages over using a credit card. It also has advantages over using cash or a check. Read this article to find out what these advantages are.
If you share this writer’s memory of older debit cards, you probably don’t miss them. You could use them in far fewer places than credit cards. If you wanted to make a purchase in most stores but didn’t have a credit card, you needed to drop by an ATM first. In the beginning, in fact, these were called ATM cards, not debit cards, because accessing ATMs was all they could do. (Rumor has it that ATM cards still exist. The writer can’t recall when he last saw one, though.)
Times have certainly changed. Today’s debit cards look (and act) very much like credit cards. They might have the word “debit” printed on them or even the word “checking.” Aside from this, they could easily be mistaken for credit cards. They’ll typically include a Visa or MasterCard logo. Debit cards have the same magnetic strip on the back and the same EMV (Europay, MasterCard, and Visa) chip on the front. They’ll have a card number that’s 16 digits long, just like credit cards. And you’ll be able to use them almost everywhere you can use a credit card.
So, when it comes to ease of use and convenience, today’s debit cards rank right up there with credit cards. Both streamline online and in-store purchases. Each produces a record of transactions that can help you understand and improve your spending habits. But they’re not completely alike. And neither is the same as cash.
So, what are the pros of using debit cards? What advantages do they have over credit cards? Over cash and checks? Let’s find out.
Debit card advantages
Debit cards have advantages over checks, cash, and credit cards. Let’s review some of them.
Here is a list of the benefits and the drawbacks of debit cards.
- Faster transactions than checks (or even cash).
- Safety features.
- Liability protection from identity theft and fraud.
- Online purchases available.
- Can help reduce impulse spending.
- Lower fees.
- No temptation to buy on credit.
- Some merchants may require a credit card.
- No access to credit.
- Credit cards provide more protection from fraud and identity theft.
Advantages of a debit card over checks and cash
A card linked to your bank account has advantages over checks and cash. These include speed, safety, and usefulness for online shopping. These cards also allow you to access services where cash or check is difficult or impossible to use.
For convenient purchases in person, swiping a card beats writing a check. True, checkout clerks at most retailers will still wait patiently if you use a paper checkbook. But customers behind you in line won’t always be as patient. And why take any longer checking out than you have to? Is using a checkbook your way of keeping your balances in mind and disciplining your spending? Well, you can add debit card purchases to your check register as easily as you add checks. As well, if you’re not carrying around paper checks, maybe your register doesn’t need to be paper either. An app might work just as well.
Swiping a card is also faster than using cash. To have the cash available in the first place, you need to spend time withdrawing it from your bank. This most likely means a trip to an ATM or requesting cash back during a debit card purchase. When you make a cash purchase, you’ll also need to count out a suitable sum of money to give the cashier. And the cashier will need to give you change. Later, when you get home, you’ll have to find something to do with that change. None of these things takes an enormous amount of time, but they all take some time. And do you really need more loose change?
Debit cards can also be safer to use than cash. Anything you carry around with you can get lost or stolen. Calling the issuer of your lost or stolen cash might get you a few laughs, but it won’t get you your money back. Calling the issuer of your lost or stolen debit card will be more productive. It will get you a replacement card and limit your liability for charges. If you report the lost card right away, in fact, you might not lose any money.
Some cards offer enhanced fraud protection. This is one thing worth considering when comparing debit and credit cards. Credit cards typically offer the most robust protection. Even so, Visa- and MasterCard-branded debit cards include many of the same safeguards.
Enhanced protections specific to certain cards are not your only protection. Your basic responsibility for fraudulent charges to your cards is set by law. The Fair Credit Billing Act (FCBA) specifies your liability for unauthorized use of your credit card. Unauthorized use of your debit card is covered by the Electronic Fund Transfer Act (EFTA).
The EFTA limits your liability for charges on your lost or stolen debit cards (or ATM cards). How quickly you report a missing card or an unauthorized charge determines your liability. Here are the specifics:
Lost or stolen debit card: EFTA liability limits
Say someone steals your information and makes an unauthorized charge using a card still in your possession. In this case, you have $0 liability if you report the unauthorized charge within 60 days of the bank statement showing it.
If you report your debit card missing before anyone uses it, you have $0 liability for unauthorized transactions. If someone uses your card before you report it missing, how quickly you report will determine your liability:
|If you report:||Your maximum liability is:|
|Before any unauthorized charges||$0|
|Within 2 business days of learning your card is missing||$50|
|More than 2 business days after learning your card is missing, but fewer than 60 calendar days after the applicable bank statement||$500|
|More than 60 calendar days after the applicable bank statement||All money in the linked account and, possibly, money in accounts linked to that account|
(Data source: Federal Trade Commission)
If you want to use a check, a few online retailers will hold an order you place until they receive and clear your check. Unfortunately, such retailers are hard to find, and there’s no telling how much longer they’ll offer this option. Even if you find one, you’ll end up waiting a lot longer to receive your order than you would otherwise. And you’ll need to buy a stamp every time you make an online purchase.
It’s no wonder that almost no one uses checks for online purchases. Using cash makes even less sense. Sending cash by mail might once have worked for grandchildren’s birthdays. But it’s never been a viable option for online commerce. Debit cards, along with credit cards, definitely win out here.
For some services, a card is (more or less) mandatory
If you want to rent a car or some equipment, you’ll be strongly encouraged to use a card for payment. Car rental companies, for example, will put a hold on your card until you return their vehicle undamaged. Equipment rental companies may do the same. Either might let you make a cash deposit to be returned to you when you return an undamaged rental. But why part with your cash when you don’t have to?
If you don’t want to rent a car or equipment, maybe you’d like to try out other services, such as a streaming media platform. Free trials for these are very common, and some viewers who binge can finish an entire series during a trial. Well, these free trials usually require a card. This lets the platforms charge you for a subscription if you don’t cancel before the trial ends. Don’t have a debit card or credit card? Sorry, no free trial for you.
Advantages of the debit card over credit card
Debit cards have advantages over credit cards. These include not sabotaging your credit and helping you spend less. Using your debit card instead of using credit could also help you avoid certain risks.
Use debit to avoid sabotaging your credit
No doubt you’ve heard that you need to have and use a credit card to build credit. This isn’t entirely true. Paying such bills as utilities and rent on time can help. This is especially true if you sign up for a service like Experian Boost.
Still, responsible use of credit will indeed help you build better credit faster. Since a debit card doesn’t use credit, using a debit card will not prove your ability to handle credit wisely. This doesn’t mean a debit card can’t help your credit score, though.
To build good credit, you need to do two things. First, you need to establish a pattern of responsible credit use. Second, you need to avoid doing anything that disrupts or contradicts that pattern. Debit cards can’t help you with the first. They can help you with the second.
Are you aware, for instance, that repeatedly using over 30% of your available credit can harm your credit score? Responsible use of credit doesn’t mean regularly maxing out your cards. Oddly enough, using less than a third of the credit you’ve been granted is best for building credit.
Need to buy something that costs more than 30% of your credit card’s available balance? Unless you can get your credit limit tripled, you’d best use your debit card. Don’t have enough money in your linked account to cover the purchase? If you can’t put it off till you have more money, consider splitting your payment. Put what you can on your debit card, then pay the rest with credit.
Deep dive: Credit utilization ratio
Credit cards, as well as lines of credit, give you what’s called revolving credit. You pay down credit card debt incurred over prior months at the same time you’re incurring new debt. Unpaid debt carries over each month as you take on new debt. So your debt is said to “revolve.” Interest accrues each month based on your outstanding balance.
Credit agencies consider many things when determining your credit score. One of them is your credit utilization ratio. This is the total revolving credit available to you divided into how much you’ve already used. First, determine how much revolving credit you owe: total up all your outstanding balances. Second, determine how much revolving credit is available to you: total up all the credit limits of your open accounts. Third, divide the first total (how much you owe) by the second (how much you can borrow). This is your credit utilization ratio.
According to experts, this ratio accounts for about 30% of your credit score. According to the same experts, a credit utilization ratio over about 0.30 (30%) will hurt your credit. Say you have $10,000 in outstanding balances and the credit limits of all your cards and credit lines add up to $30,000. This gives you a credit utilization ratio of 0.33 or 33%, which is a bit over the target maximum of 30%.
This means it’s time to switch to using only your debit card for a while.
There could be some time lag
Credit agencies calculate your ratio based on your most recently reported balance. This calculation doesn’t take into account whether the balance is new or carried over. If you have $1,000 in credit and your end-of-month statement shows $100 due, your credit ratio is .10 or 10%. Is that the most recent report of your balance credit agencies have received? Then that’s the ratio they’ll calculate. So, if you’ve just paid off all your cards so your actual ratio is 0%, that might or might not match a credit agency’s calculation.
No need to carry a balance
Time lag or not, keeping the ratio under 30% is what matters. If you’ve heard certain credit-industry rumors, don’t believe them. Carrying a balance from month to month will not improve your credit score. Banks want to see you use the credit you’ve been given. That’s true. But you don’t earn any points by letting a balance ride till next month. If you keep your credit use below 30% and make timely payments, carrying a balance won’t hurt your credit score. But it also won’t help. And it could cost you a fortune.
The only time you should even consider carrying a balance is during a 0% APR promotional period. Even then, you should make sure you’re setting aside enough money to pay off the account before the promotion ends. You could transfer a certain amount each month into a good savings account, for example.
Using debit cards could mean spending less
We’ve just seen how the ratio of available credit to used credit influences credit scores. If you use too much of your available credit, your credit score will decline. As it happens, our minds use similar ratios to tell us how much we should spend on things. Sadly, though, these ratios tend not to be sensible and rational but emotional.
We tend to judge the costliness of things based on how their price compares to the money we feel we have available to spend. And the money we feel we have available varies with our spending method. So researchers have found. If you do all your transactions in cash, you get a certain sense of how quickly money gets depleted if you, for example, buy a $5 luxury coffee every morning. On the other hand, it’s easier to ignore smaller payments when you use a credit card.
Good point. Still, there are reasons to favor debit cards over credit cards. For one thing, how much money you keep in the account linked to your debit card is under your control.
Consider this approach. Determine how much you can afford to spend each month to cover all your optional expenses. Then, at the start of each month, put only that much into the account linked to your debit card. All your non-optional expenses go into accounts unavailable to your debit card. These include the amounts you’ve dedicated to saving for retirement, setting aside for a new car, paying rent, and so on. If it’s the only way to keep yourself from thinking (feeling) this money’s available to spend, keep it at a different bank. That way, when you log in to view your debit card’s balance, you won’t see what’s available in other accounts.
What if even this strategy won’t let you use a debit card responsibly? Another solution to consider is a prepaid debit card. You have to add money manually to these cards before you can spend it. Using a prepaid debit card might help you better see the significance of all your spending.
Why is it easier to overspend with a credit card?
Credit cards are more likely to be misused than debit cards. One thing that makes this so is what psychologists call transactional decoupling. When buying something with a credit card, you don’t actually spend any money right away. Though you promise to pay for the product later, it feels (almost) like you’re getting it for free. The cost of the purchase feels less real, less “painful” than it would otherwise. The further off in the future something seems to be, the less important it feels. Future rewards seem worth less than rewards we get now. Future bills seem less costly than bills we have to pay now. Psychologists often call this delay discounting.
Avoid other pitfalls of using credit
One of the advantages of using a debit card is it protects you from some of the disadvantages of credit cards. Here are two to consider.
It isn’t that hard to find credit cards without annual fees. Even so, a debit card linked to a bank account is less likely to charge an annual fee. A prepaid debit card may charge monthly maintenance fees, but these can often be waived with direct deposit. If you use your debit card at an out-of-network ATM, you may be charged a fee. But compared to the cash advance fee for using your credit card at the same ATM, this debit card fee might not seem so bad. And it’s usually not that hard to avoid using out-of-network ATMs.
Do you think there’s even a slight chance you won’t pay off your entire credit card bill every month? If your answer’s “yes,” you might want to join the ranks of debit card users instead. During special promotional periods, some cards can have sweet rates. At all other times, though, interest charges on credit cards are insanely high. Except for lenders who break your legs if you make a late payment, almost no one offers worse loan terms than credit card companies. Even if you have a promotional interest rate, a single late payment could change that. Your 0% APR could turn into something in the 20–30% range overnight. And this figure might be conservative. Punitive rates for missed payments could be even higher.
Do the perks and other benefits of some credit cards compensate for this kind of risk? This depends on you. How big a risk is there that you’ll carry a balance or miss a payment? Do you think you can use a credit card without letting a balance build up or missing a monthly payment? If so, you could actually make money with the right credit card. Some cards pay you a percentage cash back on your qualifying purchases. If you like to travel, some cards’ perks might be even more valuable to you than cash back. Various other rewards might also appeal to you. Just be aware of the potential disadvantages and be sure to shop around.
Debit card vs. credit card: What’s the difference?
The most obvious difference between credit cards and debit cards is where their money comes from.
Credit cards: Spending borrowed money
When you use a credit card, you spend money borrowed from the card issuer, usually a bank. Except in the case of cash advances, you get to do this interest-free if you pay it back in a month. (Cash advances start accruing interest immediately.) Cash advances normally incur a fee, and some other purchases may also carry fees. This depends on your card. It’s also possible you’ll pay a yearly or monthly fee for some cards.
Debit cards: Spending your own money
When you use a debit card, you spend money you’ve deposited. Debit cards began as a replacement for bank visits and check writing. Need cash? Never mind cashing a check or lining up to see a bank teller. Instead, just drop by the automated teller machine (ATM). Over time, more features have been added, making the cards more useful. Provided there’s money in its linked account, today’s debit card can be used pretty much anywhere you’d use a credit card.
Typically, debit cards are linked to checking accounts. However, some savings accounts may come with debit cards. Money market savings accounts, which may also allow limited check writing, are an example. In the past, savings-based cards had limited usefulness because of Federal Reserve regulations. These regulations placed a six-transactions limit on no-penalty withdrawals and transfers. Though their usefulness was limited, it was better than nothing. If a bank judged you too risky for a checking account, it might still approve a savings account. If you’d been through a financial rough patch, one of these cards could’ve been your second step toward banking normalcy. Your first step might have been a prepaid card.
As it happens, this six-transactions limit is no more. At least this is true for now, at least as far as the Fed is concerned. In 2020, the Fed removed the limit as part of its pandemic response. However, the Fed’s removal of the requirement doesn’t mean your bank has removed it. Some banks retain the limit and continue to penalize violations.
Debit cards have some advantages over credit cards, checks, and cash. This isn’t to say that credit cards, checks, and cash don’t have advantages of their own.
Maybe you think credit cards are a plague sensible people should run away from as fast as they can. You and the writer of this article wouldn’t be far apart in that case. Even if that’s your view, though, you’ll have to admit at some point that we live in a credit-based society. Successful living in that type of society requires building credit. And building credit without ever using a credit card is — let’s say, challenging. However, credit cards can also be dangerous if you don’t know how to manage credit correctly.
As for checks and cash, they do have the advantage of keeping money tangible in your mind. This is especially true of cash. Our minds most naturally appreciate the value of money we can hold in our hands. We naturally treat greenbacks or coins with greater respect and care. Numbers on a bank statement or computer display don’t feel as real to us. If you can’t get control of your spending any other way, switching to cash as much as possible might be worth trying.
All that said, debit cards offer an excellent combination of convenience and security. As well, aspects of human psychology make them preferable to credit cards. They are more easily misused than cash. But most people will be able to use them responsibly with the right precautions. They won’t help you build credit as credit cards might. But debit cards are less likely to encourage irresponsible spending. In fact, a prepaid debit card may help you budget wisely.
- 10 Things You Didn’t Know About Debit Cards — SuperMoney
- Credit score myths that might be holding you back from improving your credit — Consumer Financial Protection Bureau (CBPB)
- How old do you need to be to apply for a credit card — SuperMoney
- Is Carrying Credit Card Balances a Good Strategy to Increase Your FICO® Scores? — MyFICO
- Lost or Stolen Credit, ATM, and Debit Cards — Federal Trade Commission
- Regulation D: Reserve Requirements of Depository Institutions — Federal Register
- These Guys Are Collecting Your Expired Credit Cards — MEL
- What is a Credit Utilization Rate? — SuperMoney