In my bank account basics post, I said you should never use debit cards and I promised to write a follow up post with my reasons. I’m a man of my word so here I am delivering on that promise. I’m following up quickly because this is very important. There is absolutely no reason to have a debit card at all much less use one. I ask banks not to order one when I get a new checking account and if they insist on doing so anyway, I shred it the minute it shows up without ever activating it. This is because as I will explain, debit cards aren’t just useless; they are not safe. I know, they also serve as ATM cards. So plan ahead. Keep whatever cash you might spend in a month in your wallet and replenish it when it runs low. Actually, do people still use cash? I’ve had the same sixty dollars or so in my wallet for as long as I can remember. Anyway…
As a little change of pace, I’m going to try a list format today. So without further ado, here are my reasons you should never use debit cards.
1. They are dangerous.
With a debit card, any criminal that gets ahold of your card, or more likely your card information, has direct access to your bank account. The minute that happens with your debit card, a clock starts. If you report the situation immediately and no fraudulent charges have been made yet, you aren’t liable for anything. Of course in many cases your first indication of fraud will be a fraudulent charge so you aren’t likely to be this lucky. If there are any fraudulent charges made and you notify the bank within two business days, you are only liable for the first $50 – still not a disaster, but more than I want to be paying for some asshole’s actions. If you miss the two business day mark but you do notify the bank within sixty total days, you’re on the hook for the first $500. Keep in mind that this is by far the most likely scenario. And finally, if you fail to notify the bank for a full sixty days, you are liable for ALL fraudulent charges. Ouch.
Now compare that to what happens with a credit card. You are liable for up to $50 but the vast majority of banks waive that because being able to advertise “zero fraud liability” is a bargain at that price. That’s literally it. You sleep easy knowing that when (yes, that’s WHEN, not IF) your card information is stolen/hacked/etc, your problem is limited to the inconvenience of a short conversation with the bank’s fraud department and waiting a few days for a replacement card to show up.
2. Direct access to your bank account affects more than just fraud.
I stay in a lot of hotels and when I check in, I usually see a sign informing me that if I use a debit card, a hold will be placed for more than the total expected cost of my stay to cover incidentals. I have no idea how much more because I don’t use debit cards. But it is enough that they almost always have a sign and I’m guessing that’s because they get a lot of complaints otherwise. This hold likely won’t be released until you’ve paid the final bill upon checking out and that’s at the earliest. I wouldn’t be surprised if it takes a day or two after that. And keep in mind that with a debit card, this means you literally don’t have access to this money even if it is in your bank account. If you’re not maintaining a high enough balance to account for this, you could literally wind up overdrafting because of it and no, neither the bank nor the hotel is going to pick up your overdraft fees. I often see similar signs at gas stations and I’m sure there are plenty of other businesses that do this too.
3. Debit cards aren’t very “rewarding.”
I’ve already written a post detailing how I get paid back an average of about 3% on anything I am able to pay for using credit cards. That’s not counting the churning, which gets me free flights or cash in $500-700 chunks. You always want to be looking for extra sources of income and simply using credit cards for purchases gives you a nice one that requires almost no effort and is tax free to boot. I believe debit cards do offer very limited rewards but nothing close to the bonanza credit cards do. This is because the transaction fees charged to merchants by the banks are legally limited and thus, there is less kickback money available. So by using debit cards, you are literally costing yourself money.
4. Debit cards do not help you build credit.
You need a credit score for lots of things now and rightfully so. If you don’t pay your bills on time, that is directly applicable for a creditor or a landlord but it’s also helpful information for insurance companies, employers, and many other entities that may be considering doing some sort of business with you. Why? If you don’t handle your finances responsibly, there is a strong likelihood that you make similar choices in other areas of your life. Or put another way, credit reflects character. Yes, people run into unfortunate circumstances sometimes. But those things happen to all of us. If you’re handling your finances well, you have built a nice buffer of resources and you can weather the storm as long as it isn’t something totally catastrophic. There are certainly cases where people get hit with something very few could withstand but those are outliers and far more often, this is simply an irresponsible person making excuses. Long story short, credit scoring isn’t going anywhere because the concept is sound even if the execution occasionally isn’t. Debit cards don’t build credit in any way, shape, or form; credit cards do. P.S. I think I’m going to have to write a post on the ins and outs of credit scoring. Stay tuned.
5. Debit cards don’t give you an interest free loan.
Don’t misinterpret this; in no way am I advocating carrying a balance on a credit card. Ever. But when you use a credit card to pay for a purchase, you are not billed until the statement date. At that point, you have at least twenty days before your payment is due. This means that depending on when in a month you make a purchase, you get an interest free loan of anywhere from 20-50 days. To anyone who understands the time value of money principle (there’s another post to write), that is a sweet deal! Mind you the bank is betting you will fail to pay the full statement balance by the due date and then…well, you know what happens then. Pull your pants down, bend over, and by the way, they’re fresh out of lube today. But if you’re following the credit card rules I included in my credit card post, this will never happen to you. And consequences of irresponsibility should not concern those of us who are responsible.
6. Debit cards don’t give you rental car insurance, extended warranties, price protection, and all sorts of other extra benefits.
This may seem like a minor point until you buy something for $399 and it’s marked down to $299 two weeks later. If you used a debit card to make that purchase, tough luck. But if you used one of the many credit cards that offers price protection, you’re a phone call, a simple form, and some processing time from getting your hundred bucks back. If you rent a car, most credit cards include insurance so you can laugh when the agent generously offers to charge you some exorbitant amount “for your peace of mind.” Make sure to verify that your card offers this first though. Credit cards offer all kinds of little goodies like this that debit cards do not.
In closing, I know there are people who use debit cards because they’re afraid of overspending on credit cards. But the answer to an alcohol problem is to fix your thinking and habits, not to stop drinking anything and instead start taking in fluid only through an IV. In another manner of speaking, don’t try to get rid of your disease by bleeding yourself like they did in the revolutionary war era. Hurting yourself more is not going to help. Credit cards are the adult method of paying for things. Basically, think of them like condoms; they require just a tiny little bit of thinking and planning ahead but they also protect you from being directly exposed to some really bad things. The only flaw in that analogy is that condoms turn down the volume a little whereas credit cards actually enhance the experience of paying for things. Enough fun for today. Please, shred your debit cards and start managing your finances like an adult. I promise it is much more rewarding than making excuses for not doing so.