There is a lot of noise in the personal finance world about the dangers of using a credit card. Personal finance gurus condemn them because it’s easy to go into debt. They say people mindlessly swipe when they use credit cards. Or that chasing after credit card rewards leads you down a rabbit hole to debt. The intentions behind these warnings may be spot on, but the bigger danger is your other plastic: a debit card.
Basics of a Debit Card
Your debit card (or ATM card) links directly to your checking account. The card is protected with a pin number of your choosing and provides you with physical access to your money by making ATM withdrawals or cash back at a store. The money you spend or withdrawal is immediately reflected in your checking account. It makes sense why budgeters and personal finance gurus would encourage the use of this product. Whatever you spend is reflected in your bank account. It’s the next best thing to spending cash.
Basics of a Credit Card
A credit card is not linked to a specific bank account. Your lender provides you with a credit limit and that’s the maximum you can spend in a month (which we don’t recommended ever maxing out). After your bill comes, you pay it off and start the process over again. You can link your checking account to your credit card to pay your bill, but this is not the same as a debit card. Linking a checking account to a credit card portal only allows you to transfer the money owed to the lender. It in no way is giving your credit card (or lender) easy access to the funds in your account.
Debit Card vs Credit Card
So a debit card allows you to spend the money you already have and a credit card is a loan you need to pay off each month. You may be wondering when it comes to a debit card vs credit card the answer seems obvious: debit.
But here’s the catch.
Credit cards offer significantly better protection against fraud.
Difference in Fraud Protection
A debit card being linked to your checking account seems like a positive until you come in contact with a skimmer or hackers steal information from a company’s database. Skimmers are tools used by crooks to get your information and start using your debit card. They don’t even need to physically have your debit card. You use a compromised ATM (you can’t tell it’s compromised until after) and the crook has your debit card number, name and even pin number.
The crook has direct access to your money. He’s not making charges on a credit card, but actually pulling funds out of your checking account.
You might even be liable for some of these charges!
Federal law protection varies based on when you report the loss.
*image from FTC.gov
Once you report the crime, bank will likely give you a credit to cover your losses while it opens an investigation into your fraud claim. You’ll owe the money back if the bank finds you liable.
Credit card fraud is significantly different than debit card fraud. Crooks don’t have access to your bank account. Instead, they’re racking up charges that are often detected quickly by your credit card lender. Your lender may proactively freeze your card and then call you to inquire about recent charges before closing it down and issuing you a new one.
A majority of credit card issuers provide users with a zero liability policy, so you aren’t responsible for any fraudulent charges made on your card.
Debit Card vs Credit Card: Credit Card Wins
At some point you will deal with fraud either due to hackers, skimmers, a stolen wallet or a dishonest store clerk. When this day comes, it’s best the information stolen doesn’t link directly to your bank account.