The anti-credit card movement led by thought leaders like Dave Ramsey and Suze Orman talks of the risks and dangers of using credit cards. While some of their points have merit — using a credit card can be risky in inexperienced hands — they miss the positives of responsible credit card use. Rewards, fraud protection, and other perks do come with using a credit card properly.
The alternative to credit that is given is always debit cards or cash, but instead of giving a fair comparison by looking at the downside to these payment methods those issues are ignored completely. Instead only the upside of debit cards and cash are considered in order to strengthen the position that credit cards are “evil”.
A credit card is a piece of plastic with spending power associated with it. A debit card is the same, albeit a different type of spending power. Both have positives to their responsible use. Both have severe downsides to improper use. Let’s talk about the risks inherent in using a debit card instead of a credit card.
3 Risks of Debit Cards That Do Not Apply to Credit Cards
Debit cards are not risk-free as they are often made out to be. There are serious risks involved with using and carrying a debit card.
1. Direct Impact of Fraud
The biggest risk of using a debit card is it is tied directly to your bank account. When you swipe your debit card it is just like writing a personal check directly to the merchant. The money is immediately deducted from your account.
This means if a thief gets his hands on your debit card (or debit card number) he can rack up a lot of money in charges (or ATM withdrawals) that come directly out of your account.
While most banks limit your liability for fraudulent spending to $50 (Visa actually requires its biggest partners to have a zero liability policy) that does not mean you get immediate return of your funds into your bank account. Being held responsible for the charges and getting your money back in a timely manner are two different matters.
If this type of theft occurs to you and the thief charges $1,500 at various stores before the fraudulent activity is caught and shut down that can put a big dent in your ability to pay your other bills on time. This is especially true if you are living paycheck to paycheck with little financial buffer in your account. If you normally have $1,600 in the account and someone steals $1,500 of the total — even if you get it back in 30 days — you might bounce checks and be unable to pay your other bills on the remaining $100 in your account.
With credit cards the spending isn’t tied directly to you. While the fraud is your concern, the credit card issuer is the one with the financial risk and the theft won’t damage your other financial needs.
2. No Float on Spending
When you swipe your credit card the money paid to the merchant comes from the credit card company instead of your bank account. This short-term loan is given to you, free of any interest charges, until after your next billing statement is due. You can easily get 6 weeks (or more) of interest-free money “floating” on your behalf. Floating refers to the time between when something is paid for and when the funds leave your account. It used to be used in conjunction with writing a check: you write a check today, get the item today, but the funds aren’t withdrawn until three days from now when the check is deposited.
An example with a credit card would be buying something on the 1st of the month, the day after your last statement closed. The next statement closes on the 30th, and your payment from that statement isn’t due until the 15th of the following month. You buy $2,000 worth of items on credit on the 1st, but get to hold on to the money until the middle of the next month.
In the meantime you are earning interest by holding that money in an interest-bearing account. Even if your account doesn’t pay any interest, you still have some time to get the money together to pay off the item in full. (Buying things you cannot afford on credit is how a majority of people get into credit card debt, so this isn’t recommended.)
With a debit card you do not get to enjoy this float. You swipe, sign your name (or enter your PIN), and the funds are usually removed within 24 to 48 hours.
3. Overdraft Fees
Credit cards have their own host of fees to look out for: interest charges, late fees, and the like. One fee they don’t have? The overdraft fee.
Overdraft fees make banks billions of dollars per year in profit. You spend all the money in your account, swipe your card, and somehow the charge still goes through. Sometimes you get a notification via email or text that you are overdrafting, but often you have no idea. Then every time after that where you swipe your card you get hit with a $35 fee. You could easily rack up hundreds of dollars in fees in an account with a negative balance.
Credit cards don’t have overdraft fees per se. There is such a thing as an over the limit fee — where you exceed your credit limit — but normally after that the credit card company is going to stop authorizing transactions to go through when you swipe your card.
Are Credit Cards Safer Than Debit Cards?
Depending on how responsible you are with your credit and debit card spending, your credit card use could be safer than your debit card use. The main risk with debit card revolves around how your bank handles fraudulent charges. It can be a big relief knowing your credit card company is going to not charge you for fraudulent charges on your account. The money for those transactions never leaves your account. With a debit card you might be refunded the money from the fraudulent charges immediately… or in two weeks. That’s a big risk for many people to take.