Why I Never Use a Debit Card (And You Shouldn’t Either)

Your debit card is more harmful and risky than you realize—and it could be costing you in ways you may not have considered.

One of the most common mistakes I see people make is using a debit card over a credit card for everyday spending. I understand that the intention behind using a debit card may come from a good place. Using a debit card might feel safer. You are spending real money and are thus restricted by the amount of money in your bank account. This feeling of safety is actually putting your finances in harm’s way.

My (perhaps controversial) take on the matter is to ditch your debit card unless you are withdrawing ‘necessary’ cash at an ATM. For everything else, use your credit card.

My opinion is only controversial against the theory that “credit cards are how people get into debt!” Yes, credit cards can run up debt but this is a budgeting problem, not a credit card problem. Let me explain my theory and try to convince you to stop using your debit card for everyday expenses.

The Fraud Protection Problem: Your Money vs. The Bank’s Money

I will sing this issue from the rafters as loud as I can—just ask my kids as they recently opened their first bank accounts and thus, have their first debit cards. When fraud happens on your debit card, it is YOUR money that disappears. When fraud happens on your credit card, it is THE BANK’s money that is gone.

If you have theft on your credit card, you will see fraudulent charges, call the credit card provider (e.g. Chase, Capital One, Amex), dispute those charges and continue on with your life. You will have a little bit of disruption waiting for new credit cards to arrive but that is about it. Your finances continue as usual.

If the same fraud hits your debit card, that money is gone from your checking account until the bank completes its investigation. Even if the money is eventually returned, if you have not yet built up an emergency fund, the temporary loss of cash can cause missed payments, overdraft fees, and financial stress!

Don’t think this won’t happen to you. As safe as you may be with complicated passwords, someone will gain access to your information. As I write this post, I am sitting with new credit cards for about 2 weeks now because of approximately $1,500 in charges I didn’t make (side note, it is great to set up alerts with your credit card company so that you catch the fraud as fast as possible). I am also a big fan of my Apple Card because it has a feature that resets the security code every so often, which is great should someone get access to old information. If this same fraud happened on my debit card, I would be without the money while the bank investigates the charges (7–10 business days).

In both cases you might have “zero-liability protection,” but the experience is hugely different. With a debit card it is much more stressful and much more of a fight to get your money back. With a credit card, you are just declining to pay for something you did not purchase.

I have had friends live this nightmare personally. Even worse, I have had friends experience fraud on their business debit card. It was difficult to watch the stress resulting from a very significant amount of cash get drained from their account. It took almost a month before things were back in order.

Build Credit or Build Nothing

A credit card, properly used, helps to build your credit. Do you know what a debit card does for your credit score: absolutely nothing!!

Every time you use your debit card, that is a missed opportunity to build credit history. Credit cards on the other hand, when used responsibly, can actively improve your credit score. As we discussed at Your Credit Score is Important, you really want a good credit score. It determines whether you can:

• Buy a home
• Finance a car
• Rent an apartment
• Get a job!!!! Yes some jobs require a good credit score.

This is not simply about the approval though. It is about the added cost of higher credit. Perhaps you are approved for that new home but instead of getting a 6.5% mortgage rate, you secure a rate of 8.5%. Using this example and a $300,000 mortgage, the added cost over the life of the loan is $120,000.

Using your debit card builds no credit history. When you get to a point in your life where you want to borrow money, you will be seen as more of a risk without enough credit history….all because you avoided using your credit card.

Rewards: The Money You Are Leaving on the Table

In addition to not giving you credit history, there is another thing debit cards keep from you: rewards!

There are so many types of credit card rewards that quantifying the exact amount of money you are leaving on the table can be challenging. For example, if your credit card is offering airline miles, it is not easy to put a dollar value to that reward.  So, let’s focus on the many credit cards that offer 1-2% cash back on all purchases with even higher rates offered on specific categories like gas or groceries. Debit cards offer you nothing!

Let’s do some easy math. If you use your credit card wisely and only purchase budgeted items, let’s assume you spend $2,000 per month (again, these are budgeted items like food and gas). This is $24,000 per year.

• With a debit card, you get $0 back.
• With a 2% credit card, you earn $480 every year.

That is real money you are giving up for a false sense of security.

Myth: Using a Debit Card Controls Spending

The main reason people use debit cards is so they will not overspend.

Let me be very clear: if you cannot control your spending with a credit card, you cannot control it with a debit card either.

The issue is not the method of payment. The issue is your budget or, likely, the lack of one.

Most people believe that, because the debit card is pulling directly from their checking account, they will spend less. The thought is you are limited by the amount in your account. But the problem is I have seen MANY people overdraft their accounts because they spend what they have (see Why Your Checking Account Balance Lies to You) forgetting there are bills due next week.

The solution to your spending is not using a debit card. The solution is:

1. Creating a Budget
2. Tracking Your Spending to that budget
3. Living within your means

Here is how to use your credit card like a debit card (or at least the myth of the debit card). Create the budget and only use your credit card for items you have budgeted. This will earn you points and it is easy at month end to categorize all your expenses because they are all on your monthly statement. Every month, pay off your credit card statement. This will be very easy if you stick to budgeted items. If you are worried about missing a payment, set up an automatic payment for at least the minimum balance.

The fear of using the credit card is the fear of spending up to the credit limit. Ignore the credit limit. Pretend it doesn’t exist and live according to your budget.

If you cannot stick to the 3 rules above, you have a self-control problem and no debit card will fix this.

Overdraft Fees

I mentioned this above but it is worth mentioning again. Mismanaging your spending while using a debit card can lead to costly overdraft fees.

Overdraft fees are amounts charged by banks as a penalty for overspending. To use a debit card to “avoid credit card debt” only to end up paying $35 overdraft fees is silly. I would rather you manage a credit card balance, which you control, than deal with these fees.

I also want to reiterate that every debit card swipe exposes your information to potential fraud risk. This alone should make you pause!

When a Debit Card Makes Sense

I am being very harsh against debit cards. I feel strongly they are a bad idea and only a crutch to correcting your spending habits. That being said, there are a few instances where a debit card can make sense:

1. ATM withdrawals: if you need cash, use your card at an ATM. I would argue actual cash is not needed very often. I use my credit card for 99.9% of my expenses. I will grab cash for tipping at the airport or a bar but that is about it.
2. Teaching Your Children About Money: You can use a debit card to teach your children how to manage money. You can set up an account that you fund with a small amount of money so the risk is minimal. You should also look into accounts like Greenlight to really teach money management. I wish I had exercised this approach sooner with my own kids vs simply spoiling them.
3. Avoiding Credit Card Upcharges: some small businesses will charge you a percentage fee to use a credit card: usually 2-3 percent. They are trying to pass on their cost to you. My dermatologist does this. If you frequent a location that charges this fee, and it is starting to add up, you can consider using a debit card. To back my support of not using a debit card, I always choose to pay the extra fee.

Conclusion

Using a debit card is not a good financial move. You are risking all of your cash by taking unnecessary fraud risk, missing the opportunity to build credit and missing out on potential rewards all for an illusion of managing your spending.

I promise you can change your habits and make a credit card work. Create that budget, track your credit card spending against the budget and give this a chance for 90 days. Trying is the big first step. You cannot be afraid of making mistakes. We are human. We all make mistakes. Mistakes are how we take steps forward and improve.

“Anyone who has never made a mistake has never tried anything new,” Albert Einstein

If you give this a try and it doesn’t work, that is valuable information. You have learned there is a behavioral problem to fix. Hiding from credit cards isn’t the solution. Building better habits will and ditching your debit card is a great first step.