At first glance, you might think there’s no difference between a credit card and a debit card, but looks can be deceiving. While both can be used to make purchases, only one will help you build credit. In addition, debit cards rarely offer the same benefits as credit cards. They also offer significantly less consumer protection.
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While credit cards have a bad reputation for getting people into debt, they can actually work to your advantage if you are disciplined about paying them off. They can also give you some wiggle room if finances are tight for a month. So instead of reaching for your debit card, consider taking advantage of the rewards (and protection) your credit card offers.
While there are some limited circumstances it might be useful, here are five top reasons not to use a debit card.
You Will Not Increase Your Credit Score
Since debit cards are not based on credit, they won’t help you make one each time they are used. With a debit card, you don’t borrow credit for purchases. Every time you use it, you withdraw directly from your checking account. While this may sound great to someone trying to stick to a tight budget, it won’t help you improve your credit score.
Credit reporting agencies are interested in how much you borrowed and whether you made your payments on time, not your checking account balance. So debit card purchases aren’t sent to the credit bureaus or tracked. However, if you overdraw your account due to debit card spending, you will likely face significant fees.
If you only use a debit card, it will be difficult to make credit. Failing to build credit can cost you in the long run if you are looking to make a significant purchase because they often rely on your score to determine whether you will repay the loan.
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You Won’t Get Much Protection
Another problem with debit cards is that they don’t provide much protection in case of fraud. Credit card users are protected by the Fair Credit Billing Act (15 USC 1666 – 1666j). If you report fraudulent activity, you are only liable for a maximum of $50. The majority of credit card companies cover all fees associated with the fraud.
With debit cards, you may not be so lucky. Debit cards are not covered under the Fair Credit Billing Act. Instead, consumer protection is provided by the Electronic Fund Transfer Act. Unfortunately, this protection is not as extensive as federal laws protecting credit card users.
For example, if you report fraud or loss of your debit card within two business days, you will only be liable for “less than $50 or the total amount of unauthorized transfers”. If you report theft or loss within 60 days, you may be liable for up to $500. If you do not report the fraud within 60 days, you may face unlimited liability.
The payoff is barely good
Credit card companies compete fiercely to win your business. One of the ways they have succeeded is by offering unbeatable prizes. Benefits can be geared towards what you are most passionate about, whether it’s travel, cash back, or points. While some debit cards offer things like cash-back benefits, they’re not as good as their credit card counterparts.
If you decide to stick with debit, it’s worth doing some research to determine which card offers the best deal. However, while you’re at it, you may want to skim the benefits of credit cards to see what you might be missing.
You Can End Up With High Fees
While credit cards can carry high interest rates, debit card purchases can cause you to pay exorbitant fees if you’re not paying attention.
Debit card transactions are deducted directly from your checking account. If your purchase ends up overdrawing your account, you will face hefty overdraft fees. Even worse, if you have payments such as your rent or mortgage tied to your check and they are too many, it could cause you to default.
It Won’t Help You in a Financial Emergency
Emergencies happen, especially financial ones. Unfortunately, a debit card won’t be much help if you don’t have money in the bank to cover incidentals. Debit cards are limited to what’s in your checking account. Exceeding the limit will cause your balance to go negative.
Credit cards, on the other hand, can buy you time if you’re in a pinch. Credit card companies lend money to you in the hope that you will pay it back. The good news is that if and when a financial crisis occurs, you have a cushion. The downside is that you have to work hard to avoid paying interest on what you borrow.
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This article originally appeared on GOBankingRates.com: 5 Reasons Why You Should (Almost) Never Pay With a Debit Card