Using Your Debit Card May Not Be the Best Idea

One of the biggest misconceptions floating around in personal finance land is that a debit card is always better than a credit card. The problem with this thinking is that it just isn't true. In some cases, using a credit card is actually a better idea. Especially when you think of the ways in which a debit card is woefully lacking.

Debit card issuers cash in on overdraft fees

Remember when you could count on your debit card to be rejected in the case of insufficient funds? Not anymore. Debit card issuers are now cashing in on overdraft fees. If you forget to keep track of every little thing (and this is very possible when you are using the convenience of plastic to buy your morning coffee and donut), then you might find that you are over the limit. And banks are finding if they just let you go over, they can charge you $28 to $38 per transaction. You might have three or four transactions before you even realize that you are over the limit. That can be as much as $152 out of your pocket!

Less protection

Last time I went on vacation, I left the debit card home. Why? A debit card offers less protection against loss or identity fraud. Plus, it is much harder to dispute purchases with a debit card than it is with a credit card. With a debit card, you are liable for what happens before you get it canceled in cases of theft or loss. With a credit card, as long as you report the problem within 48 hours, your liability is limited to $50. Also, a credit card protects you to a certain degree against "blocking." Many hotels and car rental companies do this. They block out more than the amount you owe to cover incidentals. The final transaction is correct, but until you check out, or return the car (and sometimes two or three days after that), the amount shown as "reserved" in your account is higher. On a debit card, this lead to an overdraft...that may not really be an overdraft.

Fewer rewards

Despite the attempts by some debit card issuers to offer credit card style rewards programs, they really aren't that good. Most debit card rewards programs aren't even close to what is offered by credit cards. For the most part, debit card rewards come encumbered so much that they are literally not worth the trouble. Credit cards, the old hands at the rewards game, are much better.

The main caveat is that you need to use responsibility when using a credit card. Make sure you pay it off every month, and you can reap the rewards without paying the interest.