Debit card and cash in pocketAs a financial coach, I advise clients to use a debit card instead of a credit card.  Some find this a bit confusing so I will explain why a debit card is recommended and a credit card is not.  First of all, they can be used at the majority of the same places for purchases, car rental (with a few exceptions) and booking and paying for hotel stays.

The main difference is one acts as cash, that’s the debit card.  A credit card is a temporary loan normally from a bank.  Essentially, it’s borrowed money and as a financial coach I don’t want you borrowing money.

  • Debit cards draw money directly from your checking account when you make the purchase. They do this by placing a hold on the amount of the purchase. Then the merchant sends in the transaction to their bank and it is transferred to the merchants account.
  • Credit card is a card that allows you to borrow money in small amounts at local merchants. You use the card to make your basic transactions.  The credit card company then charges you interest on your purchases, though there is generally a grace period of approximately thirty days before interest is charged if you do not carry your balance over from month to month.

Let’s look at it from a bank’s perspective.  A debit to your account is taking money out of your banking (normally checking) account and a credit is putting money into your account (in this case a temporary loan).  When a bank issues you a credit card, they are giving you a line of credit, this is essentially a virtual deposit.  While you don’t see it as a deposit to your account, when you make a purchase you have now used a portion of the virtual deposit.  Keep in mind this comes at an opportunity cost, in the form of interest.  So if you don’t pay the balance at the end of the month (most people don’t) you now incur a finance charge.

For example let’s say you have a 1000.00 credit limit and annual interest rate is 12 percent, when you purchase something for 100.00 and don’t pay the balance when due you incur a 1/12th charge for that month, which would be 1.00.  Your opportunity cost was 1.00 for that month, if you didn’t pay the 100.00 for the whole year that cost would increase by the new balance and the 1/2th per month interest.

So if your goal is to get out of debt, save and invest for your future don’t use a credit card.

Cash is still king.

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Use Debit Card not Credit Card

5 thoughts on “Use Debit Card not Credit Card

  • August 17, 2016 at 8:29 pm
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    Great article! Is there any difference between your liability if your debit card/number gets stolen vs a credit card?

    Reply
    • August 17, 2016 at 8:43 pm
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      The laws are similar but with a slight difference. For credit cards, the primary law is the Fair Credit Billing Act, or FCBA. For debit card transactions, the Electronic Funds Transfer Act (EFTA) applies. If you use a debt card and there is fraud, if you have possession of the physical card and notify your bank within 60 days you have zero liability. Lost or stolen card reported before unauthorized transactions: zero liability.
      Lost or stolen card reported within two days: $50 liability limit. Lost or stolen card reported within 60 days: $500 liability limit. After 60 days: no protection

      Key is report as soon as you realize a problem.

      Reply
  • August 17, 2016 at 9:04 pm
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    So is my exposure more with a debit card than a credit card?

    And if you do use a debit card, aren’t there other things you should do to protect yourself?

    Reply
    • August 18, 2016 at 12:27 pm
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      Some would argue that your exposure is greater with a debit card, I disagree. If you are diligent with your account you should be fine. You should check your debit and credit account activity at least every few days and keep an eye out for any unfamiliar transactions. If you notice anything fishy, notify your bank or credit card company immediately. Set your own fraud controls, many banks will let you set alerts for account transactions; some allow you to block transactions that are out of the ordinary for you, such as for online purchases at a certain kind of retailer or for any purchases over $500.

      The added benefit some feel from a credit card are not worth the interest you pay on the card in the long run. While I run into many folks that say they pay the card off every month, the reality is only about 29% of users pay it off every month. Here is another article on debt: https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

      Reply
  • February 22, 2017 at 7:27 pm
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    Dave / Boris, Just to add to this, the protections are the same with regard to law when transactions are processed as credit. VISA/MC offer the exact same protections and the FCBA and EFTA laws are only really applicable when the transaction is debit versus credit. In order to decrease the exposure expressed as a concern here, I always use my Debit card exactly as if it were a CC. When asked, I only offer that I will pay by credit. Rarely do I see a difference in processing. Exceptions occur with rental cars and other mainstream travel where a Hold is placed on your account for a specified dollar amount. Hope this doesn’t add confusion.

    Reply

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