The Downsides Of Debit Cards

By John Ulzheimer | December 21, 2011 AAA

Every once in a while, I write an article fully expecting to get blasted in the comments section and this is one of those articles. I'm not, and have never been, a fan of debit cards. However, I do recognize that, of all the plastic methods of payment, the debit card has the most cult-like following because of its debt-avoidance benefits.

TUTORIAL: Credit Cards

I've often said that people love (I'm using the word "love" here, people) their debit cards. If you need evidence of their affection, just look at what happened to Bank of America when they announced they'd be charging their debit card customers $5 per month just to have the card. Their customers went nuts, the media went nuts, the bank's website inexplicably went down for several days, and hundreds of thousands of people moved their accounts (and money) to credit unions. Bank of America, and all of the other banks that had announced debit card fees, quickly acquiesced to the pressure and backed off the debit card fees.

So, what are the downsides to debit cards? Well, first off, they're a direct link to your checking account and your money. I don't like anything that has such a direct connection, which is why I don't carry a checkbook anywhere, ever. If the card is stolen, or otherwise compromised, then the money that's at risk belongs to you, not a credit card issuer. That's just the first reason, and there are many more.

No Credit-Building Benefit
Love it or hate it, you need good credit reports and good credit scores. Unless you plan on paying cash for everything and driving without insurance, you're going to need credit reports and credit scores that are impressive. Using a credit card responsibly is the easiest and least expensive way to establish and maintain solid credit, plain and simple. Debit cards are not credit products and they are not reported to the credit reporting agencies. As such, they offer nothing in regards to building, maintaining or rebuilding credit reports and scores.

Fewer Protections Than Credit Cards
Let me ask you something: if I stole your credit card and your debit card, which would you be more worried about? If you answered honestly, then you said that you'd be more concerned about your debit card. Any abuse of that card comes out of your checking account, which puts other pending charges at risk of not clearing. Any abuse of a credit card is capped at $50, and most of the time that is waived by the credit card issuer. Plus, when I use your debit card fraudulently I'm using your money, not the bank's money. While many debit card issuers claim they will have your money returned within a few days, that's a few days too long, in my opinion.

Problematic
When you swipe a card at a gas station or a restaurant, the credit card processor normally holds more than the exact value of the transaction. This hold, which lasts a few days, can sometimes prevent other charges from clearing because the amount of the hold comes out of the card's "capacity," or limit. This is normally meaningless when you're using a credit card because your limit is usually significant, maybe even tens of thousands of dollars. The "limit" on your debit card is the amount of money in your checking account. If you're smart, you don't keep a lot of money in your checking account because it's earning no interest and at risk because of your debit card. This dilemma also makes debit cards practically impossible to use while traveling, because the hotel and rental car holds can be hundreds of dollars and that money is not usable until the hotel and rental car company transactions fully clear, which is the length of your stay plus a few more days.

No Less Expensive Than Using a Credit Card
I know that you can't get into debt using a debit card, and unless a bunch of banks decide to make the same mistake twice, you won't have to pay a fee to use your debit card anytime soon. You also can't get into debt using a charge card because the balance is due in full each month, but most of them have annual fees. You can also choose not to get into debt using a credit card. At the end of the day, getting into debt is your choice, not a by-product of credit cards.

The Bottom Line
There are also plenty of credit card options that don't have annual fees. The other fees associated with credit cards are pretty easy to avoid, like over-limit fees, late fees and foreign transaction fees. So, when you add up the pros and cons of each of the two types of plastic, the credit card seems to win the head-to-head comparison.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.

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