Where to Avoid Using Your Debit Card

Debit cards are being used more and more by everyone, especially the 18 to 24 age group (although with banks charging fees for debit card use, we’ll see if this changes).  This makes sense, because this age group doesn’t have as much credit. Others just want to stay out of debt and pay off their credit cards.

When should you use your debit card versus credit card? First, what is the difference between them? A debit card is connected to your checking account and is considered cash. A credit card is not connected to your checking account and you pay at a later time.

Debit cards are more convenient to carry than cash. You need to make sure you record everything you spend, so you don’t bounce checks and incur fees.  Since debit transactions are taken out of your banking account almost immediately, there is no float period.  If you have a dispute on merchandise, it is much more difficult to negotiate because the merchant has received your money, and debit cards don’t have dispute processes like credit cards.

There are some places you may want to use a credit card instead of a debit card.  I have listed seven below:

Travel –   Travel examples are airfare, travel packages and cruises for which you pay in advance for future travel. Money is taken out of your bank account at the time you make a reservation. If there is a cancellation or you have a dispute, it is much more difficult to obtain a refund with a debit versus credit card, since credit cards have a dispute process. In addition, some credit cards offer travel insurance.

Hotels and rental cars – “Blocks” or “holds” are placed on both debit and credit cards for more than the amount by hotels and rental car companies. They want to make sure you can pay for the extras and don’t leave without settling the bill.  This is a bigger issue for debit cards, because the additional amount may cause you to be overdrawn. Credit cards are a better option, because some provide insurance on car rentals.

Big ticket purchases – It is better to use a credit card for big ticket purchases, because disputes and problems are easier to resolve with a credit card. Some credit cards have extended warranties for purchases also. You have more negotiating power, if they don’t have your money already. I don’t recommend using a credit card with a high outstanding balance for these purchases, because of the interest you will be paying.

Pay and receive later – These types of purchases are items that have to be ordered, custom made and/or delivered.  If the item is not delivered or damaged, you have the dispute process with a credit card.  With a debit card, you have to deal directly with the company to handle the issue and your money is tied up until the issue is resolved.

On-line purchases – You should use credit cards for on-line purchases, since you don’t want to give on-line companies access to your checking account or anyone else, such as thieves. The security of the site is important no matter what payment method you use. It takes more time to handle identity theft with debit cards, because the investigation has to be completed before you get your money back.  Credit card transactions are credited back to your account when you inform the card issuer of the theft; you don’t incur any upfront costs. Another consideration is the item could be damaged and there is usually a dispute process with a credit card and not so with debit cards.

Recurring payments – Payments you make regularly should not be made on a debit card such as health club memberships and insurance payments. It is too easy for the company to take the money and makes it difficult to cancel the payments. In addition, you have to keep track of the dates the payments will be taken out, so you don’t overdraw your account.

Deposits – Deposits are usually required to rent equipment, vehicles, boats, etc. The deposit is usually returned, if there isn’t any damage.  When you use a debit card, the deposit is taken out of your account and cash returned when the rental is returned. With a credit card, you don’t have to pay anything upfront.

Be careful where you use your debit card, keep track of your purchases, and don’t spend more than you have.  Use your credit card in situations above, unless you don’t have any credit cards or you have too much credit card debt.

Credit Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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