With all of the recent hype over Suze Orman's new debt card, it's no wonder why many folks think it's better to use a debit card versus a credit card. But for many folks that would be a mistake. The obvious reason many folks do this is to avoid getting into debt on a credit card and the high interest rates and fees that apply when you carry a balance. But if you resolve to never carry a balance, then a credit card is a far superior purchasing tool than any debit card, for the following reasons:
Protect from fraud: When you make a purchase with a credit card, there is a firewall between your bank account and the vendor. First, there is a federal law that provides protections unique to credit cards. Then there is this example: When you purchase something on your credit card, a bank issuing the credit card makes the payment to the vendor. You are obligated to pay the bank only after you are in agreement that the charge is legit and that the item or service you bought was delivered as agreed. But make a transaction with a debit card and the payment is immediately deducted from your bank account. Federal laws and bank's policies include some protections from fraudulent or unauthorized transactions due to debit card theft. But debt card use can be riskier than using a credit card. This is because before a questionable transaction is sorted out, the money is taken from your bank account. In the meantime, if your account is depleted because of this, any checks written could bounce. For this reason, I would never use a debit card to make a purchase online.
Build credit history: Responsible use of credit cards is one of the most effective ways to build a good credit record. Consumers who don't own a credit card have average credit scores that are lower as compared to folks with at least one card, according to Credit Karma, a consumer website that provides free credit scores. The fact is, many folks will need credit when it comes time to buy a car or a house. So you want to have a good credit history and credit score. And you can only get that by having used credit responsibly and repaid a credit account on time. According to credit experts, debit cards - which are simply a card substitute for paying by check - have zero impact on your credit score.
Rent cars and book hotels: It can be difficult to rent a car without a credit card. Some hotels may not book a reservation on a debit card, and those that do often place a hold of several hundred dollars, which freezes that money in your bank account, making your available bank account balance lower, which can cause incoming checks to bounce.
Get rewards and benefits: Finally, there are the credit card benefits and rewards programs that come with credit cards, which include frequent flyer miles, gift card rewards, college savings and other programs. Some credit cards provide good rates on foreign currency conversions, so these are a good option to use when traveling in a foreign country. Many credit cards also double the manufacturer's warranty when the item is purchased on the card, making credit cards a good payment option when buying and shipping gifts in the consumer electronics category.
But when folks get into credit card debt and can't pay off their balances, the fees and interest they pay will almost always outweigh these rewards and benefits.