During the holidays, I occasionally get asked by family and friends if it’s safer to use debit or credit cards. In my opinion, this is an easy answer but instead of repeating the conversation numerous times, I decided to write a short blog about it.
So the first question is, what is the difference between debit and credit cards? As we all know, debit cards debit funds directly from your bank account, while credit cards must be paid monthly or on some other schedule. This can be good and bad depending on your approach. Some people like not using a credit card because they only spend what they have and it’s easy to track a bank balance. This is the only upside of a debit card and with tools like mint.com, the risk isn’t worth the reward anymore.
Stolen Debit Card Scenario
You’re out shopping for the holidays using your debit card where ever you can. A few days after your shopping spree you stop at Starbucks to buy a coffee and your debit card is declined. What gives? You had a few hundred dollars left in your account after your shopping spree and you assume it’s still there. At this point you either pull out cash or a credit card to purchase the coffee and then reach out to your bank. The bank explains that there was a few hundred dollar purchase that day for some online store you’ve never heard of. So it’s confirmed, your bank account has a zero or negative balance and you cannot use this account until the bank looks into the issue. The bank estimates that they will have a resolution in 3-5 days. In the meantime you cannot use the bank account because it has a zero or negative balance. If it’s a negative balance you could be charged by your bank for having negative funds and sometimes that can cost $30-40 per day. Some banks may refund this after but you might have to fight for it.
What do you do now? Hopefully you have another bank account, cash on hand, or a credit card to use while the bank looks into the issue. If you don’t, what do you do? Reach out to family, friends, etc?
This is the biggest problem when it comes to debit cards; additionally, scammers don’t need to obtain the actual card, they only need the numbers. If yours is stolen, the bad guy could empty your bank account and you could literally not have access to cash for a few days. If this happened around the holidays or a couple days before your mortgage is due this could create big problems.
Stolen Credit Card Scenario
Let’s use the same scenario above but we will be using a credit card instead. You went shopping, used your credit card, and now a few days later you are stopping at Starbucks. If the bad guy decided to max our your credit you may not be able to use it and will either need to pay with cash or use a different credit card. If the bad guy did not max out your card you may not know until you go to pay the statement. Let’s say the card was maxed out so you call the credit card company. They explain the charge on your account and you tell them it wasn’t you. They let you know that your card will no longer work and they will ship out another one same day. You inquire about the charges and if you will have to pay them. The person on the phone says the charges are already removed and a new card will arrive in 3-5 days.
Obviously, this scenario is much better because you don’t lose access to your money or bank accounts. You may lose access to this credit card but that’s why I recommend having two credit cards. This has happened to me a couple times and it takes almost no time to fix the issue, and get back to spending.
A mitigation for the debit card issue, would be to either not use your debit card unless you must, or setup a few different bank accounts so if one gets emptied, you still have access to the others. The best thing to do is to keep your debit card at home locked up somewhere securely in case you do need to use it. This is the same recommendation I have for ATM cards. Most debit cards are ATM cards these days but if they are separate I recommend keeping both of them at home, locked-up in a secure location.
I also recommend having two credits cards in your wallet in case you have an issue with one of them. Another recommendation is carrying $20 in your wallet for incidentals. An alternative approach or in addition to above, would be to setup monitoring on your cards. If I spend more than $1 on any of my cards, I get a text message letting me know where and how much I spent. This goes for my ATM card as well, so if there is a withdraw I will know about it. Most credit/debit card companies support monitoring. If you are unsure how to go about it, call the number on the back of the card.
So in short, don’t use your debit card or at the very least, make sure you monitor your cards so you know when they are being used. I hope this helps!