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When debating whether to use a credit or debit card for a purchase, you may end up confused about which is the better product for safety concerns. Each is a plastic rectangle that can be used at the same places, typically for the same things, so you might wonder if there really is much of a difference. Credit cards come with heightened consumer protection against fraud, but there are some personal safety advantages to using debit cards. Here's what you need to know so you can make the right decision.
The Difference Between Credit Cards and Debit Cards
Although credit cards and debit cards look and function alike, they're two very different products. Credit cards are equipped with a credit line, which is a fixed amount of money you can borrow from the issuer. After each charge, the issuer pays the merchant, and the amount you can borrow is reduced by that sum. So if the credit line is $2,000 and you charged $500, you'd have $1,500 left to borrow. Pay the $500 before the interest-free grace period ends, and the limit pops back up to $2,000; but pay less, and the amount you owe is rolled over to the next month and interest is added.
There is no borrowing involved with debit cards. Rather, they are connected to your checking account, so when you use a debit card, you're tapping into your own pool of funds. After you make a purchase with it, the money is transferred from your bank account to the merchant to pay for what you bought. Every time you use your debit card, the amount in your account declines by the purchase amount. You can add to your checking account at any time.
Separate Laws Limit Your Liability
When it comes to consumer protection, different laws come into play. For credit cards, the Fair Credit Billing Act (FCBA) ensures that you won't be responsible for fraudulently opened or used accounts. If someone took your credit card on a shopping spree, the most you'd be on the hook for is $50. In fact, most credit card issuers won't bother with charging you that amount at all. Once the fraud is identified, the erroneous charges are credited back to your account.
The law governing debit cards, though, is not quite so powerful. If a person used your debit card without your knowledge or authorization, your liability is protected by the Electronic Funds Transfer Act, which gives you the right to challenge fraudulent transactions. But you'd better act fast. As long as you alert the bank that your card was stolen or compromised before someone uses it, you won't be liable for any of the future transactions. Wait two business days after the fraud and you might have to pay up to $50. Miss that deadline and wait 60 days, and your liability increases to $500. Let 60 days pass and your liability is unlimited, which means all your money in the account that was taken might be lost for good.
Even if you do report a fraudulent debit card charge in time, reimbursement can take up to two weeks. That can put you in a precarious position. You may not have enough cash to pay for such vital expenses as your rent, mortgage, food or gas. And if it prevents you from paying your credit card and loan bills, a late payment can wind up on your credit report, which will negatively affect your credit scores.
When Is It Safer to Use a Debit Card?
Although the legal protection for debit cards may not be as consumer-friendly as it is for credit cards, there are a couple of compelling reasons to use them.
First, debit cards can help you avoid getting into overwhelming debt. Credit cards are valuable payment tools, but if you use them the wrong way, they can jeopardize your financial health. The average U.S. consumer credit card balance is $6,445, according to Experian data from the fourth quarter of 2018, which is a lot of money to owe. When you owe too much on your credit cards, not only is your bottom line negatively affected, but so are your credit reports and credit scores. Accessible and high credit lines lead an awful lot of people into the hole.
By focusing on using a debit card for most of your expenses, you can sidestep this problem. Create a budget so you understand your cash flow needs, and keep enough money in your checking account to meet them. When you're running out of funds, you can pull back from spending.
Second, debit cards are also financially safer than credit cards when withdrawing cash. When you use your debit card to get money from your bank's ATM (as well as affiliated ATMs and retailers, such as drug stores and supermarkets), you won't be hit with a cash advance fee. Withdraw cash from a credit card, though, and a fee of 3% to 5% of the amount of you take out will be added to the balance, and interest will start to be accumulated immediately.
When Is It Safer to Use a Credit Card?
Clearly, debit cards have some strong budgetary advantages. But there are a few key areas where credit cards are the winner for consumer protection. For example:
- Online shopping. Both card types can be used for online shopping, but a credit card is the preferred instrument. You don't want to give savvy thieves who troll the internet access to all the money in your checking account, and then have to wait until it's reimbursed.
- Traveling. When you're on the road, you'll want access to plenty of "just in case" money. If you're limited to only what's in your checking account, you could fall short in case of emergency. Also, if your credit cards are stolen and used, your full credit line will be available to you without delay after you report the theft.
- Purchasing big ticket items. Credit cards are the ideal option for especially costly purchases, such as electronics and appliances, since the FCBA protects you against disputes. If an item arrives broken or isn't what you expected (and your attempts to work out the issue with the retailer fail), you can request a chargeback from the credit card company and you'll be reimbursed. Some credit cards also offer purchase protection, which insures your purchases against theft, loss and accidental damage. If your credit card has extended warranty protection, you can file a claim even after the original manufacturer's warranty period expires.
How to Stay Safe Without a Credit Card
Prefer to use your debit card for the bulk of your purchases? No problem, just follow these tips:
- Limit the funds in your checking account. Don't hold more than you can afford to lose in the checking account associated with your debit card. A good technique is to open two accounts, one for checking and the other for savings, at the same bank. Only keep the amount of money you need to spend in your checking account, then move cash over from your savings account when necessary.
- Be careful with overdraft protection. With overdraft protection, your bank will tap into a linked source of funds, such as your savings account or a credit card, to cover transactions that exceed the amount in your checking account. The upside is that you'll avoid overdraft fees. The downside is if a thief uses your debit card, that person will then not only be able to grab your money from your checking account, but from the linked account as well. If you're particularly concerned about fraud, you may want to disable this feature.
- Monitor your account statements. It's always wise to maintain a close watch on all your transactions. On a daily or weekly basis, use your bank's app or review your statements online. Not only will you be able to plan ahead for spending, but you'll also spot any fraudulent activity that you need to address before it can hurt you.
So are credit cards safer than debit cards? Regarding consumer protection advantages, the answer is usually yes. But if you want to build a barrier against big credit card balances, which can also be dangerous, a debit card might be the better choice. Having both types at your disposal, however, and using them in an informed way will help you steer clear of danger.