More than half of all card transactions are now being paid with debit cards rather than credit cards, according to the Nilson Report. The debate between debit cards and credit cards continues on. Many people made the switch to debit cards in an effort to avoid racking up too much debt and to help manage their budget more efficiently. The problem with this theory is the costly expense of overdraft fees if you mistakenly overdraw your account – and the fact that you lose out on many benefits by not using credit cards.
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Despite the reinvention of the credit card industry and the recent legislation changes during a troubling economic period, there are still many benefits to using credit cards over debit cards which you may have overlooked, including:
- Build credit – People who only ever use debit cards or cash to pay for their purchases are going to have a lower credit score than people who use and pay for credit card purchases in a responsible manner. A credit score is calculated based on a number of factors, including the types of credit you use, how much credit you have available, and the average age of credit accounts.
- Buy now, pay later – If your paycheck doesn’t always come in at the same time as your bills, you can benefit from paying all of your monthly expenses on a credit card and then paying it off at the end of each month. Just keep track of what you’re spending or paying for with the card, and make sure you have enough money set aside to pay it when the bill comes in. This is a much better alternative to payday loans and debit card overdrafts.
- Avoid usurious fees – It’s somewhat counter intuitive, given their reputation, but credit card fees are 100% avoidable. Meanwhile, many of the prepaid debit cards that people are starting to use in their place charge monthly fees, annual fees, usage fees, ATM fees, and fees to reload them. So they actually end up costing much more.
- Avoid fraud from ATM skimmers – Many thieves target bank ATMs with skimmers designed to steal your card details. As you swipe your card through an ATM a thief has targeted to make a withdrawal, your card details are being transmitted to the robber who can then use them to make online purchases or over-the-phone orders. In some cases, thieves can have cards created with your information so they can use them for in-person transactions, as well.
- Purchase and return protection – if you order something with a credit card that never arrives, or you pay with credit for a product that is not as it was advertised, the credit card companies will mediate for you. Many cards will also help out if an item you purchase gets stolen or broken.
- Less fraud liability – if your credit card doesn’t offer a $0 fraud liability clause, the most you’ll have to pay if your card is stolen and used without your permission is $50. With a debit card, if you don’t report the fraud within 48 hours of it happening, you can be liable for up to $500 for fraudulent charges. Plus with a credit card you have the option of not paying for fraudulent purchases while they’re being settled, but with debit that stolen money is gone until the bank gets it back to you.
- Rent cars and reserve hotels – not all car rental companies or hotels will allow you to use a debit card. And if they do, they will usually put a hold on your card for a much higher amount as a security deposit. If you have a credit card you can rent a car and reserve hotels without difficulty.
- Earn better rewards – While many banks have started to offer rewards programs in combination with their debit cards, debit rewards programs pale in comparison to the average credit card rewards program.
Credit cards have earned a bad name in the finance industry for charging high interest and fees to cardholders. But credit cards are not evil; they are a tool. And if you use them responsibly — by only using it for things you can afford to buy and then paying your bill off in full each month — you’ll enjoy numerous benefits that you just don’t get when you use a debit card.
Tim Chen is CEO of NerdWallet. NerdWallet helps you find the best credit card, by sorting nearly 600 credit cards by best rewards and lowest APRs. Tim writes about credit cards for the Forbes Moneybuilder Blog, Huffington Post, and the Christian Science Monitor.