Many consumers rely on their debit cards for everyday purchases, finding comfort in the direct withdrawal from their bank accounts which helps avoid accumulating debt, unlike with credit cards. However, when it comes to online shopping, there are compelling reasons to opt for a credit card instead.
Utilizing a debit card for online transactions can expose you to heightened risks of financial loss in case of fraud. Additionally, you forfeit significant consumer protections and rewards associated with credit card usage, both online and in-store.
Here’s why switching from debit to credit might be a wise choice:
- Increased vulnerability to fraud:
Despite common assumptions, liability for fraudulent transactions isn’t as limited with debit cards as with credit cards. While most credit cards offer zero fraud liability under the Fair Credit Billing Act (FCBA), debit card transactions lack the same level of protection.
In the event of fraud, individuals with access to your debit card information could potentially drain your entire bank account. Failure to promptly notice or report fraudulent activity may result in irrecoverable losses.
According to the Federal Trade Commission (FTC), your liability hinges on the timing of fraud detection and reporting. If reported within two business days of discovery, you’re liable for a maximum of $50 in losses. Reporting within two to 60 days after receiving your statement caps your liability at $500. Beyond this timeframe, you risk losing all funds in your debit account, including those linked to associated accounts.
- Missing out on rewards:
Apart from exposing yourself to fraud risks, there are numerous benefits you’re foregoing by using a debit card for online transactions. For instance, you could be accruing cash back or travel rewards if you opted for a rewards or travel credit card instead. These rewards can accumulate swiftly, facilitating opportunities to explore the world or indulge in purchases like merchandise and gift cards.
While rewards or travel credit cards typically offer 1% to 3% cash back, you can amplify your rewards by leveraging cash back, travel rewards, or airline portals. While it’s possible to shop through portals with a debit card in some instances, your earning potential may be predominantly limited to airline miles or cash back.
- Missing sign-up bonuses:
Using a debit card for online shopping also means forfeiting the chance to earn substantial sign-up bonuses. It’s essential to note that many rewards credit cards extend lucrative bonuses worth $500 or more when you fulfill a minimum spending requirement within a specified timeframe.
Contrary to common belief, obtaining sign-up bonuses or ongoing rewards doesn’t necessarily entail paying an annual fee on a credit card. Numerous rewards credit cards provide substantial bonuses, ongoing rewards, and additional perks without imposing an annual fee.
- Forfeiting consumer protections:
Opting for credit over debit presents an opportunity to qualify for valuable consumer protections and complimentary insurance. These protections extend to various aspects, including travel safeguards such as trip cancellation/interruption insurance, rental car coverage, travel accident insurance, baggage delay coverage, and more.
Moreover, credit transactions often come with additional safeguards for online purchases, such as extended warranties, purchase protection, and guaranteed returns. Unfortunately, these benefits are typically unavailable when using a debit card for online transactions.
- Neglecting credit history development:
A critical reason to reconsider your debit card usage is the missed opportunity to build credit history through your online purchases and daily expenditures. Unlike debit transactions, credit card usage involves regular purchases and payments that are reported to the three major credit bureaus—Experian, Equifax, and TransUnion.
The significance of having credit activity reported to these bureaus cannot be overstated, as it serves as evidence of your creditworthiness and forms the basis for potential increases in your credit score over time. While using a debit card won’t harm your credit score, it also won’t contribute to its improvement.
Considering a credit card? Here’s a cautionary note:
Although online debit transactions pose higher risks and offer fewer rewards, it’s crucial to assess whether you’re suited for credit card usage. While credit cards offer superior fraud protection, potential rewards, and valuable consumer safeguards, they also present a temptation to overspend and accumulate debt.
Prior to applying for a credit card and incorporating it into your spending habits, it’s essential to ensure a firm commitment to adhering to your budget and spending within your means. Accumulating significant debt with the typically high-interest rates of credit cards can negate any benefits derived from rewards and protections.
