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A recent study by The Nilson Report indicates that debit cards are the most widely used payment system, outnumbering credit card transaction volume by almost a 2 to 1 margin. However, debit cards carry advantages and disadvantages relative to other payment types. That’s why, today, I am going to share with you the debit card pros and cons you need to know.
What is a Debit Card?
Before discussing the pros and cons of debit cards, let’s first cover what a debit card is and how it works.
A debit card is nothing more than a plastic card tied to a checking account that allows you to make purchases. Debit cards allow you to use your checking account at almost any merchant, all without the hassle of writing a check.
Debit cards typically (with some exceptions) allow you only to spend the money in your checking account. When you use your debit card, money is withdrawn immediately from your account.
On the other hand, credit cards allow you to spend up to a credit limit, and purchases aren’t paid until a little while later, typically about a month after your credit card closing date.
Now that we’ve covered what debit cards are let’s cover some of the pros of debit cards.
Pros of Debit Cards
If you’ve been wondering why debit cards are better than other payment types, you’ve come to the right place.
Debit cards have some unique features that can help you make sound money decisions, stay out of debt, and conveniently make payments.
1. Stay Out of Debt
First, and perhaps most importantly, debit cards help you live within your means and stay out of debt. Why? Because you skip out on the temptation to spend more money than you have.
When you can only spend the money in your bank account, you are less likely to overspend.
2. Instantly View Balances
When it comes to knowing your bank account balance, debit cards have the advantage of showing you exactly how much money you have at any point in time. On the other hand, with credit cards, you have to consider how much you owe and when your statement is due relative to the balance in your checking account. This makes managing a debit card easier than managing a credit card.
3. No Credit Check Required
Next, debit cards are easy to get. If you can open a checking account, you can get a debit card. There is no credit check required. Why? Because the bank has virtually no risk. You simply cannot spend more than is in your bank account.
4. More Convenient than Cash
When it comes to using debit cards, I tend to think of them a lot like cash. You use them to spend the money you have in the bank.
However, debit cards are much easier to use than cash, because you always have access to the full amount in your bank account, and it’s much easier to handle if you lose a debit card than if you lose cash.
5. Low-Cost ATM Access
Another benefit of debit cards is that if you need access to cash, your debit card doubles as an ATM card. When you use the ATM, you withdraw money directly from your account, and you can often do so with no fee if you use an ATM in your bank’s network.
Compare this to credit cards, where you’ll end up paying a hefty price for drawing cash out of an ATM (because you’re using borrowed money).
6. No Annual Fees
Because debit cards are associated with your checking account, you won’t (typically) pay any sort of annual fee for use. Compare this to credit cards, where some cards carry an annual fee of hundreds of dollars.
Cons of Debit Cards
While debit cards do have some perks, there are some excellent reasons why you shouldn’t use debit cards. I want to cover those disadvantages here.
First, you may be wondering which is safer: a debit card or a credit card. Well, the answer here is unequivocal that credit cards are safer. Here’s why.
With a credit card, if someone fraudulently uses your credit card, your liability is limited to $50 under the Fair Credit Billing Act (and zero if they did not have your physical card).
With debit cards, however, the story gets quite a bit more complicated. If your card is lost or stolen, and you notify your bank within two business days, your liability for unauthorized purchases is limited to $50.
If you fail to notify the bank within two business days, but you tell the bank within 60 days after your statement detailing unauthorized charges is mailed to you, your total liability is $500.
However, if you fail to notify your bank within 60 days, your liability is unlimited. Let me say that again. Your liability is unlimited.
So, let’s use an extreme example and say you don’t check your bank account because you’re rolling in dough, and someone buys $25,000 of jewelry using your stolen debit card. If you fail to notify your bank within the required window, you’re out of luck, and you’re out $25,000.
Also, because money leaves your account immediately, it could take some time to get money back if there is a dispute.
It’s worth noting that many banks now offer protection over and above what is required by law, so it is worth checking into the details of your account. If, however, your bank does not offer protection, the onus is on you to carefully monitor your bank account for abnormalities.
Of course, debit cards do have some security features, like the fact that a PIN is required to make a purchase. That said, there are some places you should not use a debit card, including:
- Independent ATMs (i.e., ATMs not from a name-brand bank)
- Gas Stations
- Rental Cars
While debit cards don’t come with an annual fee, it is not uncommon for them to carry other types of costs.
For example, debit cards often carry ATM fees if used at an out-of-network ATM. ATM fees are now nearing $5 per transaction according to a Bankrate study.
Another type of fee is an account maintenance fee. Some accounts require a minimum account balance; otherwise, they will charge a monthly maintenance fee. I try to steer clear of these accounts, and I recommend you do as well.
Finally, if you attempt to spend more on your debit card than is available in your account, your bank might charge you a hefty overdraft fee. As of 2019, the average overdraft fee was $33.36, according to Bankrate.
It’s worth noting that you can avoid many fees by being smart about the bank you choose for your checking account and debit card.
Personally, the number one thing I don’t like about debit cards is the lack of rewards most cards offer. By comparison, credit cards provide significant rewards, including cash back, points on travel, etc. You can check out three of my favorite credit cards and how I maximize my rewards earning strategy.
As someone focused on my finances, I never carry a credit card balance, and I nearly always choose to use a credit card where possible because of the potential rewards.
I would also highlight that credit cards often have more robust consumer protections such as trip cancelation insurance, rental car insurance, etc. If these things are important to you, consider using a credit card instead.
4. Debit Cards Don’t Build Credit
Next, if you’re looking to build your credit score, you’ll need to use a credit card instead. Why? Debit cards don’t show fiscal responsibility with borrowed money, because you’re using your own money instead of the bank’s.
Using a credit card, borrowing money for a house, etc. are the types of activities that build your credit, but debit cards don’t have this advantage.
5. Inconvenience of Entering Pin
Finally, while it’s a small gripe, using a debit card requires entering a PIN every time you use your card. Entering your PIN can be a slight inconvenience when it comes to completing transactions.
However, consider this to be a security advantage and something that can help keep you safe.
Best Checking Account: Which Bank Should You Use?
If you’re looking to set up a debit card, you’ll need a checking account to get started.
While there are many options to choose from, some key things to look for include:
- No (or low) minimum balance requirements (both to open the account and ongoing)
- No (or low) fees
- If you can find it, an account that pays interest is preferable
Three of my favorite checking accounts include:
Ally’s Interest Checking Account pays 0.10% interest as of the time of this writing and 0.25% on accounts with an average $15,000 minimum daily balance. Ally also allows you to use 43,000 Allpoint ATMs for free and will reimburse up to $10 per statement cycle for out-of-network ATMs. There are no monthly maintenance fees or minimum opening deposit requirements.
Axos Bank is a bank I recently discovered, and their high-yield savings account is very appealing. They offer significantly more interest on checking accounts than any other bank I have found. Additionally, they provide unlimited ATM fee reimbursements, no monthly maintenance fees, no overdraft fees, and no monthly minimum balance requirement. Simply put, it’s probably the best set of perks I’ve found on any checking account to date.
CIT Bank’s checking account offers 0.10% interest on balances less than $25,000, and they require just $100 to open an account. The account also offers ATM fee reimbursement up to $30 per month, and they charge no monthly fees.
Debit Card Pros & Cons: A Summary
Now that you know a little more about the pros & cons of debit cards, you may be wondering if you should use a debit card for your everyday purchases.
My answer is straightforward. If you are diligent enough to pay your credit card bill in full every month, you should put everything possible on a credit card. You have the potential to earn substantial rewards, and the security protections are much better.
If, however, you are a chronic over spender and know you need a little discipline, a debit card is the way to go.
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