According to a 2015 Money Under 30 study of young adults’ spending habits, Millennials prefer debit cards to credit cards by a ratio of almost two to one. This isn’t surprising, considering this generation had a front row seat for the debt-fueled financial crisis and many of them are already burdened with serious student loans. Being wary of debt is a good thing; relying on debit cards rather than credit cards for everyday purchases, however, comes with costs and risks.
Credit card rewards are like a built-in discount
The most apparent cost of using a debit card instead of a credit card is lost rewards. For consumers with good credit, leading cash rewards credit cards can give you between 1.5 and 2 percent back on every purchase. Some travel rewards credit cards are even more rewarding.
Grabbing these rewards assumes that you pay back all of your charges at the end of every billing cycle, of course. If you tend to get spendy when you don’t immediately feel cash leaving your wallet or funds leaving your checking account, stick with a debit card.
If, however, you’re just using a debit card out of habit—or an outdated notion that paying with a credit card is inherently bad, read on.
Credit cards provide better safeguards against theft
If your credit card is stolen and the thief goes on a $1,000 shopping spree, you’re covered. Credit card purchases are covered under the Truth In Lending Act, a federal statute that limits consumer liability to no more than $50; most banks will not hold you liable for any charges.
Debit card purchases, on the other hand, are covered under the Electronic Funds Transfer Act, which limits your liability to different amounts based on when you report the card missing. If you do it within two days of the fraudulent charges, your liability is limited to the same as credit card purchases: $50. If you report it three days later, your potential liability balloons to up to $500. Past 60 days, you could be liable for the entire amount.
Banks obviously want to keep their customers happy, and some may review fraudulent charges on a case-by-case basis; but, unlike credit cards, there’s no law saying they have to.
You also get better fraud protection from debit cards if you sign for your purchase, rather than if you enter your PIN. Even though fraud is more likely with a signature than a PIN, banks offer more coverage for signature purchases because they earn more fees that way. (When you sign, a purchase is routed through VISA or MasterCard’s networks, and they pocket the fees; when you use your PIN, it often goes through the PIN network, and the PIN network makes the money.) Some debit card issuers will also offer zero-liability on PIN purchases, as long as that purchase is processed via their networks. But there’s no way for the card holder to know which vendor uses which networks.
With a credit card, you don’t have to worry about how many days it’s been since the fraudulent charges appeared, or which network processed your payment. You’re just covered.
If the thief wipes out your checking account, you have no cash to pay rent and bills until the bank clears up the theft and gives you your money back. You could also be liable for any overdraft fees triggered by the theft.
Typically, replacing a lost or stolen credit card is faster than replacing a debit card. Most credit card banks will overnight you a replacement card. With a debit card, it varies. Overnight card replacement may be available to some premium checking customers at certain banks. At other banks, debit card replacements can take up to two weeks, leaving you at risk of being unable to pay your bills and accumulating late fees.
Large credit card companies can disable your stolen card immediately (Discover credit cards, for example, offer the FreezeIt feature, allowing you to turn your card off and on from a mobile app the instant you suspect it’s compromised).
Credit cards give you more power to dispute charges
When you’re making a large purchase—such as a new appliance or furniture—using a credit card is safer than a debit card.
If something goes wrong with the item or the delivery service, you can dispute the charges with the credit card company, who will work directly with the vendor or manufacturer to resolve the issue. You don’t have to pay the charge until the matter is resolved, and if the vendor does not resolve the complaint to your satisfaction, you don’t pay at all.
You have fewer protections, with a debit card, especially as the money will have already been withdrawn from your account.
Some credit card companies also offer free extended warranties on purchases, car rental insurance, and more.
Debit cards often have steep “holds”
When you use a debit card at gas stations, hotels and car rental agencies, the merchant will place a hold on your account for a specified amount before you make the purchase to guarantee your account has sufficient funds. These holds could be for more than twice the amount of what you’re buying (for example, a $75 hold for a $30 tank of gas, or a $500 hold for a $200 car rental).
“Blocking,” similar to holds, will put a charge on your card for the total estimated amount of your stay. So, if you’re staying for five days and the room costs $100 a night, then the hotel will put a “block” of at least $500 (and probably a little more, in case you go crazy on the mini bar) on your debit card. If you pay with that card, the charge replaces the block. If you pay with a different card, however, that block may stay on your card for up to 15 days.
Speaking of rental cars
If you often travel for work or pleasure, relying solely on debit card can cause significant hassles. While hotels have gotten better at accepting debit cards, car rental companies are not debit-card friendly.
At some chains, including Enterprise, the official policy is that you cannot reserve a car with a debit card. (Though it’s perfectly fine to pay for the car after the rental with one). Other companies—Dollar is one—will let you reserve a car with a debit card only if you submit to a credit check. The most lenient companies will let you reserve a rental with a debit card but may require proof of a round-trip airfare and place a large hold on the card (at Alamo, for example, the minimum hold is $500).
While the rental car companies’ policies are subject to change, this article provides a good breakdown of the debit card car rental policies at many leading companies.
Last but not least, credit cards build credit
When you’re young, there’s another critical reason to use a credit card. To build and improve your credit rating.
It’s a far-from-perfect system, but your credit score matters. If you want a car loan, a mortgage, a cell phone plan, an apartment, and—right or wrong—sometimes even a job, somebody is going to check your credit.
Debit cards don’t bolster your credit history—period.
Credit cards, on the other hand, are an instrumental part of building good credit. Even if you already have student loans or a car loan on your credit report, your score won’t climb as high as it could unless you also have a track record or managing revolving credit responsibly.
Read more: How to build credit for the very first time
There are some compelling reasons to use a credit card instead of a debit card. A few good reasons are cash back, avoiding hassle if you need to dispute a charge or have fraud on your account, and an easier time traveling. Of course, the best reason of all to use a credit card instead of a debit card is building credit. If you are paying your credit card off in full every month, it might be a good idea to choose credit over debit.